Business Cycles and Currency Returns

75 Pages Posted: 23 Sep 2019 Last revised: 12 May 2021

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Steven Riddiough

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

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Date Written: September 2019

Abstract

We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Suggested Citation

Colacito, Riccardo and Riddiough, Steven and Sarno, Lucio, Business Cycles and Currency Returns (September 2019). NBER Working Paper No. w26299, Available at SSRN: https://ssrn.com/abstract=3458224

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

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Cambridge, MA 02138
United States

Steven Riddiough

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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