Does analyst dispersion on macro economic factors affect the foreign exchange risk premium?

Abstract

Borrowing in low-interest countries and investing in high-interest countries is recognized as a “carry trade” strategy, where the return is identified as the currency risk premium. In this paper, we examine if a more extensive disagreement among the analysts prior to the release of macroeconomic variables will reward investors with a higher currency risk premium. We used data on 14 different currencies with respect to the US-dollar, and constructed a global macro uncertainty index denoted by inflation rate and the unemployment rate in the selected countries. Our results indicate that there is ample evidence that investors demand compensation for bearing more risk and for investing in currencies with higher analyst dispersion in the macro environment.