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Home > Research > Staff Working Paper No. 537: What do stock markets tell us about exchange rates? - Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente
 

Staff Working Paper No. 537: What do stock markets tell us about exchange rates? - Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente

24 July 2015

​Staff Working Paper No. 537
What do stock markets tell us about exchange rates?
Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente

The sign of the correlation between equity returns and exchange rate returns can be positive or negative in theory. Using data for a broad set of 42 countries, we find that exchange rate movements are in fact unrelated to differentials in country-level equity returns. Consequently, a trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial returns and Sharpe ratios. These returns partially reflect compensation for global equity volatility risk, but significant excess returns remain after controlling for exposure to standard risk factors.

Appendix

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