Sovereign Risk and Currency Returns

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

Sovereign Risk and Currency Returns

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

Department of Finance

Research output: Contribution to conference › Paper › Research › peer-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 language	English
Publication date	16 Jul 2014
Number of pages	45
Publication status	Published - 16 Jul 2014
Event	The 41th European Finance Association Annual Meeting (EFA 2014) - Palazzo dei Congressi, Lugano, Switzerland Duration: 27 Aug 2014 → 30 Aug 2014 Conference number: 41 http://www.efa2014.org/

Conference

Conference	The 41th European Finance Association Annual Meeting (EFA 2014)
Number	41
Location	Palazzo dei Congressi
Country/Territory	Switzerland
City	Lugano
Period	27/08/2014 → 30/08/2014
Internet address	http://www.efa2014.org/

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https://www.conftool.com/efa2014/index.php/EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf?page=downloadPaper&filename=EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf&form_id=1520&form_version=final

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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. https://www.conftool.com/efa2014/index.php/EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf?page=downloadPaper&filename=EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf&form_id=1520&form_version=final

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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, 27/08/2014 - 30/08/2014. <https://www.conftool.com/efa2014/index.php/EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf?page=downloadPaper&filename=EFA_2014-1520-Della_Corte-Sovereign_Risk_and_Currency_Returns.pdf&form_id=1520&form_version=final>

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AU - Della Corte, Pasquale

AU - Sarno, Lucio

AU - Schmeling, Maik

AU - Wagner, Christian

N1 - Conference code: 41

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

T2 - The 41th European Finance Association Annual Meeting (EFA 2014)

Y2 - 27 August 2014 through 30 August 2014

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