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Commodity Currencies Revisited

Passari, Evgenia (2015-06), Commodity Currencies Revisited, 32nd International Conference of the French Finance Association - AFFI 2015, 2015-06, Cergy, France

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Type
Communication / Conférence
Date
2015-06
Conference title
32nd International Conference of the French Finance Association - AFFI 2015
Conference date
2015-06
Conference city
Cergy
Conference country
France
Pages
63
Metadata
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Author(s)
Passari, Evgenia
Dauphine Recherches en Management [DRM]
Abstract (EN)
I build an exchange rate strategy that trades currencies conditional on changes in the global prices of commodity indices; hence, termed “commodity strategy”. First, I document that commodity prices have signicant out-of-sample forecasting ability for the future exchange rates of several commodity exporters and importers at the daily frequency. However, I report that the reverse forecasting relationship does not survive out-of-sample testing. Second, I find a signicant cross-sectional spread, in both spot and excess returns, of 6% p.a. between the currencies that are predicted to appreciate and those that are predicted to depreciate. The returns appear to be uncorrelated to those of popular exchange rate strategies such as the carry trade and currency momentum. Furthermore, the spread in returns is not explained by traditional risk factors; however, it is partly accounted for by the strategy’s high transaction costs. Net probability can be restored by either implementing a simple market timing rule or by investing in developed markets with low costs and high liquidity.
Subjects / Keywords
Foreign Exchange; Commodity Currencies; Asset Pricing
JEL
F31 - Foreign Exchange
F37 - International Finance Forecasting and Simulation: Models and Applications
G10 - General
G11 - Portfolio Choice; Investment Decisions

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