Working Paper: CEPR ID: DP15054
Authors: Ilias Filippou; Arie Gozluklu; My Nguyen; Mark Taylor
Abstract: We develop a novel measure of U.S. populist rhetoric. Aggregate Populist Rhetoric (APR) Indexspikes around populist events. We decompose the APR Index into sub-indices. We show thatAPR Index and International Relations sub-index are negatively priced in the cross-section ofcurrency excess returns. Currencies that perform well (badly) when U.S. populist rhetoricis high yield low (high) expected excess returns. Investors require high risk premium forholding currencies which underperform in times of rising U.S. populist rhetoric, especiallyin the post-crisis period. A long-short strategy that buys (sells) currencies with high (low)exposure to U.S. populism offers strong diversification benefits.
Keywords: populism; foreign exchange market; textual analysis
JEL Codes: G11; G12; G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US populist rhetoric (D72) | currency returns (F31) |
| low exposure to US populist rhetoric (F69) | high expected excess returns (G17) |
| high exposure to US populist rhetoric (F69) | low expected excess returns (G17) |
| US populist rhetoric (D72) | demand for higher expected returns from risky assets (G19) |
| marginal utility of consumption increases during rising populist rhetoric (D11) | demand for higher expected returns (G19) |