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Currency Exposure to Downside Risk: Which Fundamentals Matter?
Author(s) -
Dobrynskaya Victoria
Publication year - 2015
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12174
Subject(s) - economics , downside risk , monetary economics , currency , foreign exchange risk , real interest rate , interest rate , inflation (cosmology) , exchange rate , financial economics , portfolio , physics , theoretical physics
Abstract I study whether or not countries' macroeconomic characteristics are systematically related to their currencies' exposure to the downside market risk. I find that the currency downside risk is strongly associated with the local inflation rate, real interest rate and net foreign asset position. Currencies of countries with high inflation and real interest rates and negative net foreign asset position (debtor countries) are more exposed to the downside risk whereas currencies of countries with low inflation and real interest rates and positive net foreign asset position (creditor countries) exhibit “safe haven” properties. The local real interest rate has the highest explanatory power in accounting for the cross‐section of currency exposure to the downside risk. This suggests that the high currency exposure to the downside risk is a consequence of investments in high‐yield risky countries and flight from them in “hard times”.