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 language | English |
---|---|
Publisher | Social Science Research Network (SSRN) |
DOIs | |
Publication status | Online 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