
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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Communication / ConférenceDate
2015-06Conference title
32nd International Conference of the French Finance Association - AFFI 2015Conference date
2015-06Conference city
CergyConference country
FrancePages
63
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Show full item recordAbstract (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 PricingRelated items
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