Currency returns, intrinsic value and institutional investor flows

Froot, Kenneth and Ramadorai, Tarun (2005) Currency returns, intrinsic value and institutional investor flows. The Journal of Finance, 60 (3). pp. 1535-1566.

Abstract

We decompose currency returns into (permanent) intrinsic-value shocks and (transitory) expected-return shocks. We explore interactions between these shocks, currency returns, and institutional-investor currency flows. Intrinsic-value shocks are: dwarfed by expected-return shocks (yet currency returns overreact to them); unrelated to flows (although expected-return shocks correlate with flows); and related positively to forecasted cumulated-interest differentials. These results suggest flows are related to short-term currency returns, while fundamentals better explain long-term returns and values. They also rationalize the long-observed poor performance of exchange-rate models: by ignoring the distinction between permanent and transitory exchange-rate changes, prior tests obscure the connection between currencies and fundamentals.

Item Type: Article
Keywords: Currency; Value; Investors; finance
Subject(s): Finance
Date Deposited: 01 Apr 2012 12:51
Last Modified: 27 Feb 2017 10:01
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3085

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