Tag Archives: Uncovered equity parity

The Relation Between Stock and Currency Returns

Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente.

Various theories suggest that exchange rate fluctuations and stock returns are linked. We find little evidence of a relation between the two. Thus, a simple trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial risk-adjusted returns. This strategy is akin to a carry trade strategy executed using stocks rather than money market instruments, but is uncorrelated with the conventional carry trade strategy. The returns can only be partly explained as compensation for risk.

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Filed under Currency, Financial Markets, International Economics