Research

Working Papers

Global Portfolio Network and Currency Risk Premia 

Peter Sinclair Price for Best Paper at MMF PhD Conference

The position of countries in a network of external portfolio investments can explain cross-sectional variation in currency risk premia and introduces a novel macroeconomic characteristic to comprehend violations of uncovered interest rate parity. Using bilateral portfolio data from 2001 to 2021 for 26 countries, I develop a network centrality measure where a country is central if it is integrated with key countries that account for a large share in the supply of tradeable financial assets. These centrality measures are persistent over time and present a country-specific source of economic risk, capturing heterogeneity in currency risk exposure. I find that currency excess returns and interest rates decrease as network centrality increases. Empirical asset pricing tests show that the derived centrality risk factor is priced in a cross-section of currency portfolios. Further, negative global shocks cause the currencies of central countries to appreciate while those of peripheral countries depreciate. I discuss these findings in a consumption-based capital asset pricing model, where central countries experience lower consumption growth in high marginal utility states, leading to currency appreciation.

Protectionism, Bilateral Integration, and the Cross Section of Exchange Rate Returns in US Presidential Debates (with Stefan Eichler and Ingmar Rövekamp) 

CEPIE Working Paper No. 03/22 

We study the impact of US presidential election TV debates on intraday exchange rates of 96 currencies from 1996 to 2016. We find that expectations about protectionist measures are the main transmission channel of debate outcomes. Currencies of countries with high levels of bilateral foreign trade with the US depreciate if the election probability of the protectionist candidate increases during the debate. We rationalize our results in a model where a debate victory of a protectionist candidate raises expectations about future tariffs and reduces future net exports to the US, resulting in relative depreciation of currencies with high bilateral trade integration.

FX Dealer Constraints and External Imbalances (with Stefan Eichler) 

We study the relationship between the financial sector and exchange rates by empirically testing the model predictions of Gabaix and Maggiori (2015) that tighter financial constraints of intermediaries lead to increased currency risk premia. Using balance sheet data from the ten largest FX dealer banks spanning 2004 to 2021, we construct an intermediary constraints index that reflects the risk-bearing capacity of intermediaries. The innovations in the intermediary constraints index explain cross-sectional variation in returns to currency portfolios sorted by countries' net foreign assets. Our results imply higher (lower) intermediary risk premia for currency portfolios of net external debtors (creditors) that pay low (high) returns when constraints are tightening.  When constraints tighten, currencies of countries with low net foreign assets tend to depreciate, whereas those with high net foreign assets tend to appreciate. This depreciation is especially pronounced for emerging market currencies and in cases where countries have large outstanding net debt liabilities and low foreign exchange reserves.

Publications

Business Cycle Variations in Exchange Rate Correlations: Revisiting Global Currency Hedging (with K. J. Bövers and S. Meyer), 2020, Finance Research Letters, 33:101195