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Exchange rates and monetary policy uncertainty
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Mueller, Philippe, Tahbaz-Salehi, Alireza and Vedolin, Andrea (2017) Exchange rates and monetary policy uncertainty. The Journal of Finance , 72 (3). pp. 1213-1252. doi:10.1111/jofi.12499 ISSN 0022-1082.
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Official URL: http://dx.doi.org/10.1111/jofi.12499
Abstract
We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group | ||||||||
Library of Congress Subject Headings (LCSH): | Foreign exchange, Monetary policy, United States. Federal Open Market Committee | ||||||||
Journal or Publication Title: | The Journal of Finance | ||||||||
Publisher: | Wiley-Blackwell Publishing, Inc. | ||||||||
ISSN: | 0022-1082 | ||||||||
Official Date: | June 2017 | ||||||||
Dates: |
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Volume: | 72 | ||||||||
Number: | 3 | ||||||||
Page Range: | pp. 1213-1252 | ||||||||
DOI: | 10.1111/jofi.12499 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 1 November 2017 | ||||||||
Date of first compliant Open Access: | 13 April 2019 | ||||||||
Funder: | Systemic Risk Centre, Economic and Social Research Council (Great Britain) (ESRC) | ||||||||
Grant number: | ES/K002309/1 (ESRC) |
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