Currency Return Dynamics: What Is the Role of U.S. Macroeconomic Regimes?

Guanhao Feng, Jingyu He, Junye Li, Lucio Sarno, Qianshu Zhang

    Research output: Working PapersPreprint

    Abstract

    This paper examines how changes in U.S. macroeconomic conditions affect the underlying factors that drive currency return dynamics. The study adopts a tree-based Bayesian regime-switching model that identifies shifts in currency return dynamics instrumented by macroeconomic variables. The empirical analysis finds strong evidence of regime changes in the currency risk-return relationship, which are determined interactively by U.S. inflation and interest rates. The carry factor is identified as a common and dominant factor across all regimes, generating a high risk premium and selection probability, while other factors are regime-specific.
    Original languageEnglish
    PublisherSocial Science Research Network (SSRN)
    DOIs
    Publication statusOnline published - 12 Jul 2024

    Bibliographical note

    Research Unit(s) information for this publication is provided by the author(s) concerned.

    Research Keywords

    • Business Cycles
    • Currency Returns
    • Decision Tree
    • Regime Switches
    • Risk Premia

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