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.

2015 CEPR Conference on "Macro-Financial Linkages" and Current Account Imbalances, 2015 ASSA meetings, 2015 Kiel Workshop on Exchange Rates, 2015 RCEA Money and Finance Workshop, 2013 WFA meeting, 2013 EFMA meeting, 2013 First Annual Conference on "Foreign Exchange Markets," 2013 China International Conference in Finance, 2013 Asian Finance Association meeting, 2013 EFA conference, 2013 FMA meeting, 2013 Royal Economic Society Conference, Bank of Canada/Bank of Spain Workshop on "International Financial Markets," 2013 International Paris Finance Meeting, 2012 Annual Conference on "Advances in the Analysis of Hedge Fund Strategies," 2012 ECB-Bank of Italy Workshop on "Financial Determinants of Exchange Rates."

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.

Bank of England, ECB, EEA 2014, 2014 World Congress of the IEA, DNB/IMF Conference on “International Banking: Micro-foundations and Macroeconomic Implications”

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

The Value of Volume in Foreign Exchange

with Antonio Gargano and Lucio Sarno 

We investigate the information content of foreign exchange (FX) volume using a novel dataset from CLS, the leading FX settlement institution. Consistent with theoretical predictions from models containing liquidity trading and private information, we find that FX volume embeds predictive information for both the time series and cross section of currency returns, which generates substantial economic value. A reversal investment strategy that conditions on past daily volume generates an annualized return of over 19% and a Sharpe ratio of 1.82. We show the returns remain high after accounting for bid-ask spreads, and are unrelated to other common currency strategies and risk factors.

12th Annual Hedge Fund Conference at Imperial College London, the 7th Workshop on Financial Determinants of Foreign Exchange Rates at Norges Bank, the 2nd Quandl Alternative Data Conference in New York, the Wellington Finance Summit  2017, and the Southern University of Science and Technology, University of Essex and Birkbeck College, University of London.

Business Cycles and Currency Returns

with Lucio Sarno

2017 "WINNER" Best Paper Award Second Prize (ZZ Vermögensverwaltung and POK Pühringer Privatstiftung in collaboration with WU Vienna University of Economics and Business)

2017 CFA Best Paper Prize, FIRN Annual Conference

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 in both 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. These results contrast with a vast literature that detects no linkages between currency fluctuations and macroeconomic variables.

2018 American Finance Association; 2017 Auckland Finance Conference; 2017 China International Conference in Finance; 2017 Wellington Finance Summit; 2017 FIRN Annual Conference; 6th Workshop on 'Financial Determinants of Exchange Rates,' Bank of England; 2016 Australian National University Annual Summer Camp; the 9th INQUIRE Business School Workshop, Cass Business School; BI Norwegian Business School, Oslo; University of Geneva; University of Melbourne.