Trade Imbalance Network and Currency Risk Premium

 SSRN version


Abstract

This paper proposes a new risk factor based on the centrality of a global trade imbalance  network to explain foreign exchange rate fluctuations and currency risk premia associated with a currency carry trade strategy. We build a directed in-degree trading network in which global countries are linked by their pairwise trade deficit using import and export trade data collected from the UN Comtrade Database. After sorting currency portfolios based on the centrality scores, a new risk factor, i.e., CMP, Central Minus Peripheral portfolio is created by buying central countries’ currencies and selling peripheral countries’ currencies. We then use this risk factor to explain the cross-sectional variations of the currency excess returns and the currency risk premia. Our results confirm the explanatory power of the new risk factor. We show also that the new risk factor has significant explanatory power to currency risk premium and cross-sectional currency excess returns beyond the existing risk factors.


 


Effects of Economic Policy Uncertainty Shocks on the Long-Run US-UK Stock Market Correlation

(with Hossein Agharian & Carlotte Christiansen) SSRN version 


Abstract

We use the economic policy uncertainty indices of Baker, Bloom, and Davis (2016) in combination with themixed data sampling (MIDAS) approach to investigate the US and UK stock market movements. The long-runUS-UK stock market correlation depends positively on US economic policy uncertainty shocks. The US long-run stock market volatility depends significantly on the US economic policy uncertainty shocks but not on UK shocks while the UK depends significantly on both.


The variance based efficiency test of the OMX Index option market

(with Magnus Wiktorsson,  RuiZhi, Zhao). SU Working Paper Version 


Abstract

We use the economic policy uncertainty indices of Baker, Bloom, and Davis (2016) in combination with themixed data sampling (MIDAS) approach to investigate the US and UK stock market movements. The long-runUS-UK stock market correlation depends positively on US economic policy uncertainty shocks. The US long-run stock market volatility depends significantly on the US economic policy uncertainty shocks but not on UK shocks while the UK depends significantly on both.