Working Paper: NBER ID: w23764
Authors: Kimberly A. Berg; Nelson Mark
Abstract: We study the cross-sectional variation of carry-trade-generated currency excess returns in terms of their exposure to global macroeconomic fundamental risk. The risk factor is the cross-country high-minus-low conditional skewness of the unemployment rate gap. It gives a measure of global macroeconomic uncertainty and is robustly priced in currency excess returns. A widening of the high-minus-low skewness of the unemployment rate gap signifies increasing divergence, disparity, and inequality of economic performance across countries.
Keywords: currency excess returns; global macroeconomic risk; carry trade
JEL Codes: F3; F4; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-minus-low conditional skewness of the unemployment rate gap (hmlskew) (J69) | currency excess returns (F31) |
| high-minus-low conditional skewness of the unemployment rate gap (hmlskew) (J69) | global economic uncertainty (F69) |
| global economic uncertainty (F69) | currency excess returns (F31) |
| high-minus-low conditional skewness of the unemployment rate gap (hmlskew) (J69) | dispersion in economic performance across countries (O57) |
| low interest and low currency excess return portfolios (G15) | currency value (F31) |
| high interest portfolios (G11) | currency yield (F31) |