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 |
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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) |
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Number | 41 |
Location | Palazzo dei Congressi |
Country/Territory | Switzerland |
City | Lugano |
Period | 27/08/2014 → 30/08/2014 |
Internet address |