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.
Original languageEnglish
Publication date16 Jul 2014
Number of pages45
Publication statusPublished - 16 Jul 2014
EventThe 41th European Finance Association Annual Meeting (EFA 2014) - Palazzo dei Congressi, Lugano, Switzerland
Duration: 27 Aug 201430 Aug 2014
Conference number: 41
http://www.efa2014.org/

Conference

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

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