Business Cycles and Currency Returns

with Ric Colacito and Lucio Sarno.

Journal of Financial Economics accepted

2017 "WINNER" Best Paper Award Second Prize (Vienna Symposium in FX Markets)
2017 CFA Best Paper Prize, FIRN Annual Conference  
Media coverage:
CFA Institute, published 30 July 2018

We find a strong link between currency returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency strategies, and cannot be understood using traditional risk factors. We also show that a business cycle factor implied by our results is priced in a broad currency cross section. Finally, we propose a mechanism that generates these facts using an international macro-finance model with long-run risk.

Global Currency Hedging with Common Risk Factors

with Wei Opie.

Journal of Financial Economics forthcoming

We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging strategy outperforms leading alternative approaches to currency hedging across a large set of out-of-sample performance metrics. Moreover, we find that exploiting currency return predictability via an independent currency portfolio delivers a high risk-adjusted return and provides superior diversification gains to global equity and bond investors relative to currency carry, value, and momentum investment strategies.

Currency Premia and Global Imbalances

with Pasquale Della Corte and Lucio Sarno 

Review of Financial Studies   

We show that a global imbalance risk factor that captures the spread in countries’ external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.

Della Corte, Pasquale, Steven J. Riddiough and Lucio Sarno (2016). "Currency Premia and Global Imbalances," Review of Financial Studies 29(8), 2161-2193.

Winner of the Kepos Capital Award for the Best Paper on Investments at the WFA 2013
Winner of an Inquire Europe Research Grant (EUR 10,000)            

Media coverage:, published 29 February 2016

The Two Faces of Cross-Border Banking Flows

with Dennis Reinhardt

IMF Economic Review     

We examine the determinants of cross-border interbank and intra-group funding across crisis and non-crisis periods. Using a previously unexplored data set spanning 25 banking systems, we find aggregate intra-group funding is unrelated to fluctuations in either global or local macroeconomic fluctuations, while flightier interbank funding responds pro-cyclically to both worldwide and domestic economic trends. This feature of the data means intra-group funding remains comparatively stable when global conditions deteriorate -- even during the global financial crisis. During `normal' times we find intra-group funding responds counter-cyclically to global interest rate changes, with parent banks using affiliates to o set tighter global funding conditions. More generally, we find intra-group funding has a closer relationship with domestic banking system profitability and solvency, being used to support banks in weaker banking systems during the global financial crisis.

Reinhardt, Dennis, and Steven J. Riddiough (2015). "The Two Faces of Cross-Border Banking Flows," IMF Economic Review 63(4), 751-791.                                                                                                                                          

Bank of England Working Paper No. 498   
Media coverage:, published 7 May 2014

Working Papers

Foreign Exchange Volume

with Antonio Gargano and Lucio Sarno. Latest version: April 2019

R&R Review of Financial Studies

Media coverage: Quant News (1 and 2), published March 16 2018 and August 24 2018

We provide the first comprehensive study of foreign exchange (FX) volume using a novel dataset offering the broadest coverage of volume at high frequency. FX volume is related to volatility, liquidity, information arrival, and return spreads across equity and bond markets. However we find it is the unexpected component of volume that can predict short-term currency returns: when a currency pair's daily volume is unexpectedly low, it exhibits a strong return reversal over the following day. This predictability is economically valuable for currency investors and is consistent with an asymmetric information hypothesis, in which privately informed trading increases with volume.

Work in Progress

Fake Volume in Cryptocurrency Markets

with Vincent Gregoire and Zhuo Zhong

Portfolio Choices among Immigrants

with Martin Ljunge and Alexander Ljungqvist

M&A Activity and Currency Return Predictability

with Jodie Zhang

How Do Mutual Funds Manage Currency Exposure?

with Wei Opie