What do stock markets tell us about exchange rates?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 July 2015

Working Paper No. 537
By 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.

PDFDownload PDF

PDFDownload Appendix

Was this page useful?
Add your details...