Currency Factors / Arash Aloosh, Geert Bekaert.

Format:

Book

Author/Creator:

Aloosh, Arash.

Contributor:

National Bureau of Economic Research.

Bekaert, Geert.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25449.

NBER working paper series no. w25449

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We examine the ability of existing and new factor models to explain the comovements of G10- currency changes, measured using the novel concept of "currency baskets", representing the overall movement of a particular currency. Using a clustering technique, we find a clear two-block structure in currency comovements with the first block containing mostly the dollar currencies, and the other the European currencies. A factor model incorporating this "clustering" factor and two additional factors, a commodity currency factor and a "world" factor based on trading volumes, fits currency basket correlations much better than extant factors, such as value and carry, do. In particular, it explains on average about 60% of currency variation and generates a root mean squared error relative to sample correlations of only 0.11. The model also fits comovements in emerging market currencies well. Economically, the correlations between currency baskets underlying the factor structure are inversely related to the physical distances between countries. The factor structure is also related to the exposure of the corresponding pricing kernels with respect to the global pricing kernel and is apparent in cross-country retail sales growth data.

Notes:

Print version record

January 2019.