Sovereign Risk and Currency Returns

Pasquale Della Corte, Lucio Sarno, Maik Schmeling, Christian Wagner

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.
We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.

Conference

ConferenceThe 41th European Finance Association Annual Meeting (EFA 2014)
Number41
LocationPalazzo dei Congressi
CountrySwitzerland
CityLugano
Period27/08/201430/08/2014
Internet address

Keywords

    Cite this

    Della Corte, P., Sarno, L., Schmeling, M., & Wagner, C. (2014). Sovereign Risk and Currency Returns. Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland.
    Della Corte, Pasquale ; Sarno, Lucio ; Schmeling, Maik ; Wagner, Christian. / Sovereign Risk and Currency Returns. Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland.45 p.
    @conference{dd7911edc71943099311a9958385256a,
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    keywords = "Sovereign risk, CDS spreads, Currency risk, Carry trades, Volatility trading, Options",
    author = "{Della Corte}, Pasquale and Lucio Sarno and Maik Schmeling and Christian Wagner",
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    Della Corte, P, Sarno, L, Schmeling, M & Wagner, C 2014, 'Sovereign Risk and Currency Returns' Paper presented at, Lugano, Switzerland, 27/08/2014 - 30/08/2014, .

    Sovereign Risk and Currency Returns. / Della Corte, Pasquale; Sarno, Lucio; Schmeling, Maik; Wagner, Christian.

    2014. Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland.

    Research output: Contribution to conferencePaperResearchpeer-review

    TY - CONF

    T1 - Sovereign Risk and Currency Returns

    AU - Della Corte,Pasquale

    AU - Sarno,Lucio

    AU - Schmeling,Maik

    AU - Wagner,Christian

    PY - 2014/7/16

    Y1 - 2014/7/16

    N2 - We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.

    AB - We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.

    KW - Sovereign risk

    KW - CDS spreads

    KW - Currency risk

    KW - Carry trades

    KW - Volatility trading

    KW - Options

    M3 - Paper

    ER -

    Della Corte P, Sarno L, Schmeling M, Wagner C. Sovereign Risk and Currency Returns. 2014. Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland.