Title: Financial intermediation and the cross-section of FX returns
Authors: Dennis Umlandt - Kiel University (Germany) [presenting]
Stefan Reitz - (Germany)
Abstract: Recent contributions point to the importance of balance sheet variables of financial intermediaries for the cross-section of excess returns in several asset classes. We show that shocks to the equity capital ratio of financial intermediaries explain variations in the returns of carry trades, which are popular investment strategies that borrow in low and invest in high interest rate currencies. To allow for time-varying market prices of risk and betas a regression-based dynamic asset pricing approach is employed. Strong support for time-variation in the market price of risk is found and the equity capital ratio factor performs well in comparison to other popular pricing factors of currency returns.