Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319984 
Year of Publication: 
2015
Series/Report no.: 
CASMEF Working Paper Series No. WP 2015/07
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
We investigate if unemployment fluctuations generate predictability in the cross-section of currency excess returns. To assess the predictability exerted by unemployment fluctuations, we sort currencies according to past growth in the unemployment rate. We find that an investment strategy which shorts currencies that experienced high growth in the unemployment rate and invests in currencies that experienced low growth in the unemployment rate, produces positive and sizable excess returns. This strategy improves the performance of the optimal portfolio of the currency investor. Moreover, a principal component analysis suggests an interpretation of this strategy as a risk-factor which drives the variability of portfolio average returns. Asset pricing tests show that popular risk factors in the FX literature are not priced in the cross-section of portfolios sorted on past unemployment fluctuations.
Subjects: 
currency portfolio returns
unemployment fluctuations
predictability
risk-premia
asset pricing
JEL: 
F31
F44
E44
G12
G15
Document Type: 
Working Paper

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