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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: Cass Business School, which is part of City University London, delivers innovative, relevant and forward-looking education, consultancy and research. Cass is located in the heart of one of the world’s leading financial centers. It has strong links to both the City of London and its corporate, financial and professional service firms, as well as to the thriving entrepreneurial hub of Tech City – located close to the School. Cass’s MBA, specialist Masters and undergraduate degrees have a global reputation for excellence, and the School supports nearly 100 PhD students. Cass offers one of the widest portfolio of specialist Masters programmes in Europe. It also has the largest faculties of Finance and Actuarial Science and Insurance in the region. As examples of recent independent rankings of our research, Cass is ranked number 3 in Europe for its finance research, number 2 in Europe and number 11 in the world for banking research, and number 1 in Europe and number 2 in the world for actuarial science research. Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other's thinking. www.cass.city.ac.uk @casbusiness