Exchange rate return predictability in times of geopolitical risk

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4 Citations (Scopus)

Abstract

We develop the hypothesis that geopolitical risk predicts exchange rate returns. Using data on 17 countries, we demonstrate that the information content embedded in geopolitical risk is economically useful and can improve the forecast accuracy of exchange rate returns. We show that geopolitical risk predicts 10 out of 17 (59%) exchange rate returns in in-sample tests while in out-of-sample tests predictability is found for 88% of currencies. Buy and sell signals generated from our model lead to higher returns compared to the historical average model. Our model delivers excess profits relative to the benchmark model in 11 out of 17 (65%) currencies.

Original languageEnglish
Article number102099
Number of pages13
JournalInternational Review of Financial Analysis
Volume81
DOIs
Publication statusPublished - May 2022

Keywords

  • Exchange rate returns
  • Geopolitical risk
  • Predictability
  • Trading strategies

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