The disease outbreak channel of exchange rate return predictability: evidence from COVID-19

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Abstract

We provide novel evidence that disease outbreaks contain valuable information that can be used to enhance exchange rate return and volatility predictions. Our analysis exploits the novel coronavirus (COVID-19) outbreak as a good experimental setup to test our intuition. Data show that the COVID-19 outbreak has been rapid and deadly. Using the total number of infections per million, we demonstrate that COVID-19 has better predictive power over volatility than over returns for a one-day ahead forecast horizon. Conversely, COVID-19 tends to shape returns more than volatility over a five-day ahead forecast horizon. Our findings remain intact over the two forecast horizons using the total number of deaths per million as an alternative COVID-19 measure. This evidence supports a new channel of exchange rate return predictability, namely the disease outbreak channel.

Original languageEnglish
Pages (from-to)2277-2297
Number of pages21
JournalEmerging Markets Finance and Trade
Volume56
Issue number10
DOIs
Publication statusPublished - 8 Aug 2020
Externally publishedYes

Keywords

  • COVID-19
  • disease outbreaks
  • exchange rate return and volatility
  • novel coronavirus
  • pandemic
  • predictability

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