Gravity in FX R-Squared: Understanding the Factor Structure in Exchange Rates / Hanno Lustig, Robert J. Richmond.

Format:

Book

Author/Creator:

Lustig, Hanno.

Contributor:

National Bureau of Economic Research.

Richmond, Robert J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23773.

NBER working paper series no. w23773

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Gravity in FX R-Squared

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We relate the risk characteristics of currencies to measures of physical, cultural, and institutional distance. The currencies of countries which are more distant from other countries are more exposed to systematic currency risk. This is due to a gravity effect in the factor structure of bilateral exchange rates: When a currency appreciates against a basket of all other currencies, its bilateral exchange rate appreciates more against the currencies of distant countries. As a result, currencies of peripheral countries are more exposed to the systematic variation than currencies of central countries. Trade network centrality is the best predictor of a currency's average exposure to systematic risk.

Notes:

Print version record

September 2017.