Download FOR IMMEDIATE RELEASE What do stock markets tell us about

FOR IMMEDIATE RELEASE
What do stock markets tell us about exchange rates?
International investors can make significant US Dollar returns from betting on movements on national
stock markets.
Recent research by academics at the Cass Business School, the Bank of England and City University
Hong Kong uses data for more than 40 markets observed over 30 years to show that average returns
of up to 12% per annum are available to those allocating assets across international stock markets.
The authors – Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente – focus on the extent
to which movements in exchange rates might erode predictable movements in international stock
markets and show that there is effectively no such erosion. This leaves significant returns available to
investors allocating money across global stock markets when returns are measured in an investor’s
home currency. The result also means that predictable movements in stock markets are of no use in
predicting exchange rate movements.
The work, published as a Bank of England working paper and forthcoming in the Review of Finance,
goes on to show that the returns available to international investors cannot be wholly explained as
compensation for bearing stock market or currency market risk and are not explained away by
transaction costs. The strategy’s returns are also uncorrelated with those from existing, well-known
international investment strategies (e.g. FX carry) and thus may provide a nice complement to
international portfolios based on those traditional lines.
Payne commented that “The punchline of the first part of the paper is that if, for example, you are
confident that the Japanese stock market is going to rise relative to the UK stock market, this tells you
nothing about movements in the JPY relative to the GBP. So the correlation between stock market
returns and currency returns is roughly zero in the cross-section.”
Sarno further explained that “the fact that movements in exchange rates don’t wipe out predictable
movements in equity market returns means that there is money on the table for global investors and
this is true if you use raw returns or if you compute risk-adjusted returns.”
The working paper is available here:
http://www.bankofengland.co.uk/research/Pages/workingpapers/2015/swp537.aspx
ENDS
Media enquiries:
Kyla Njoku, Senior Communications Officer, Cass Business School
Tel: 07970 357650
E-mail: [email protected]
Notes to Editors:
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