East Asian Economic Review
- Volume 18 Issue 2
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- Pages.111-142
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- 2014
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- 2508-1640(pISSN)
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- 2508-1667(eISSN)
DOI QR Code
Country Fundamentals and Currency Excess Returns
- Kim, Daehwan (Department of Economics, Konkuk University) ;
- Song, Chi-Young (Department of Commerce and Finance, Kookmin University)
- Received : 2014.03.18
- Accepted : 2014.05.12
- Published : 2014.06.30
Abstract
We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical results show that fundamental factors explain a large part of the cross-section of currency excess returns. The zero-intercept restriction of the factor model is not rejected for most currencies. They also reveal that our factor model with country fundamentals performs better than a factor model with usual investment-style factors. Our main empirical results are based on 2001-2010 balanced panel data of 19 major currencies. This paper may fill the gap between country fundamentals and practitioners' strategies on currency investment.
Keywords
- Currency Excess Returns;
- Country Fundamentals;
- Factor Model;
- Fundamental Factors;
- Investment-style Factors