Emerging Market Currency Excess Returns
We discuss the foreign currency forward premium puzzle in the context of 20 internationally tradable emerging market currencies. We find that since the late 1990s the broad basket of emerging market currencies has provided significant equity-like excess returns against a number of major market currencies, but with low volatility. We also find that the forward premium, or carry, is significant in explaining that excess return but that excess returns would still have existed even in the absence of positive carry. Our calculation shows that transactions cost due to bid/offer spreads is substantially lower than commonly supposed in the academic literature.
Stephen Gilmore is an employee of Banque AIG. Fumio Hayashi works from time to time as a paid consultant for Banque AIG. We thank Geert Rouwenhorst and Makoto Saito for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Stephen Gilmore & Fumio Hayashi, 2011. "Emerging Market Currency Excess Returns," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 85-111, October. citation courtesy of