Currency returns, intrinsic value, and institutional investor flows
By: Kenneth A. Froot and Tarun Ramadorai
Contributors: Ramadorai, Tarun; Harvard Business School. Division of Research
Edition: Rev.].
Series: Working paper / Division of Research, Harvard Business School -- 04-036; Working paper (Harvard Business School. Division of Research) -- 04-036
Publisher: Division of Research, Harvard Business School
Published: 2003
Place of publication: Boston
Language: eng
Number of pages: 36
Subjects: Foreign exchange rates; Foreign exchange market; Institutional investments; Rate of return
Description: We decompose currency returns into permanent changes in intrinsic value and transitory movements, called respectively, intrinsic-value and expected-return shocks. We then explore these components and their interactions with institutional investor currency flows. We find that: expected-return shocks are much larger than intrinsic-value shocks; returns overreact to intrinsic-value shocks; expected-return shocks are reliably related to flows whereas intrinsic-value shocks are not; and that intrinsic-return shocks are, as theory would predict, positively related to forecasts of cumulated innovations of interest differentials.
Notes: "This version: December 2003"--Added t.p.

Revision of: Currency returns, institutional investor flows, and exchange rate fundamentals. Series no. 03-008.

Includes bibliographical references.