Various theories suggest that exchange rate fluctuations and stock returns are linked. In this column, the authors find little evidence of a relationship between the two. Thus, a simple trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial risk-adjusted returns.
Gino Cenedese, Richard Payne, Lucio Sarno, Giorgio Valente, Friday, July 17, 2015
Maurizio Michael Habib, Livio Stracca, Friday, February 28, 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
Marianne Andries, Bruno Biais, Monday, October 21, 2013
The 2013 Nobel Prize in economics goes to Lars Hansen, Eugene Fama, and Robert Shiller. This column describes the significance of their contributions in the context of the broader literature. The prizes are well deserved. Their careful investigation of data – informed by deep understanding of theory – taught us much of what we know about asset pricing.
Ian Dew-Becker, Stefano Giglio, Sunday, October 20, 2013
Stabilisation policy should focus on the frequencies consumers care most about. This column presents evidence from stock-market returns suggesting that consumers are willing to pay the most to avoid – and are therefore most concerned about – fluctuations that last tens or hundreds of years. Modern macroeconomic theory tends to view the role of monetary policy as smoothing out inflation and unemployment over the business cycle. The authors’ findings suggest that resources would be better spent on policies that smooth out longer-run fluctuations.
Dimitri Vayanos, Paul Woolley, Monday, October 5, 2009
Have capital market booms and crashes discredited the efficient market hypothesis? This column says yes and suggests a new model that explains asset pricing in terms of a battle between fair value and momentum driven by principal-agent issues. Investment agents’ rational profit seeking gives rise to mispricing and volatility.
Jian Wang, Friday, September 5, 2008
A random walk is (in)famously a better predictor of short-term exchange rates than models emphasising economic fundamentals. This column explains recent literature that has addressed the puzzle by considering an asset-pricing approach. Fundamentals (and expectations of them) are still relevant.