Currency for Return Research


13/01/2015 The Role of Currencies in Institutional Portfolios

Javier Corominas and Jonathan Scott recently contributed a chapter to a new book by Pojarliev and Levich on 'The Role of Currency in Institutional Portfolios'. The chapter discusses the economic rationale behind emerging market currency returns and the rewarded risk that investors can access by investing in them. 

For more on this book, please click here


01/01/2012 The Case for Emerging Market Currency Investment

The Case for Emerging Market Currency Investment

As emerging market (EM) countries become richer their currencies become stronger and in so doing their currencies converge with those of developed countries. One of the most compelling arguments for this is based on the convergence of EM per capita income towards that of industrialised (OECD) countries. This is probably best explained by the work of the economists Balassa and Samuelson.

According to the Balassa-Samuelson (B-S) effect the real exchange rate (i.e. how many real goods does a particular currency unit actually buy) is broadly a function of relative productivity growth over the longer term. Countries that exhibit high productivity growth are likely to have a tendency to see rising domestic prices and thus an appreciating real exchange rate.

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21/11/2011 Assessing Sources of Excess Return in Currencies

Assessing Sources of Excess Return in Currencies

This summary paper represents Record's view of the opportunities to generate excess returns in currencies (November 2011). Currency exposure is often viewed as a source of extra volatility which is unrewarded in the sense that it generates no excess return over time.

In this paper we counter this view, arguing that the FX market resembles other markets in that it contains opportunities which persistently deliver excess returns. The existence of return opportunities in the currency market (which is, by its nature, a zero sum game) is justified by two facts: firstly, a large proportion of market participants are not profit seekers; and secondly, countries in external balance of payments deficit have to make their currencies' prospective return sufficiently good to attract currency investors.

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01/08/2011 The Currency Forward Rate Bias as an Asset Class

The Currency Forward Rate Bias as an Asset Class

Currency markets in the aggregate are necessarily 'zero sum' markets - i.e. an appreciation in the value of one currency can only be expressed by reference to another currency, which necessarily experiences a corresponding depreciation.  There is therefore no aggregate 'return' from simply holding currencies, by contrast to equities, for example.

Notwithstanding this aggregate performance, there are empirically-observable and persistent price patterns that prevail in currency markets.  The purpose of this paper is to evaluate the proposal that one of these price patterns, the 'forward rate bias' (FRB), represents a rational 'risk premium', i.e. payment of a reward for risk assumed in connection with an economic function.

The significance of the identification of the FRB, or indeed any other price pattern, as a risk premium is that it provides justification for long-term strategic investors, who seek to allocate capital to rewarded risks, to regard that premium as an asset class, and hence potentially worthy of long-term strategic capital allocation, provided certain criteria are met.  This paper also considers what those additional criteria might be, and evaluates whether the FRB meets them.

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01/11/2009 The Balassa-Samuelson Effect Explained

The Balassa-Samuelson Effect Explained

The most compelling argument for investing in emerging markets relies on per capita income convergence towards that of industrialised countries. This, the Balassa-Samuelson effect, is examined in this paper.

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