We provide novel evidence that disease outbreaks contain valuable information that can be used to enhance exchange rate return and volatility predictions. Our analysis exploits the novel coronavirus (COVID-19) outbreak as a good experimental setup to test our intuition. Data show that the COVID-19 outbreak has been rapid and deadly. Using the total number of infections per million, we demonstrate that COVID-19 has better predictive power over volatility than over returns for a one-day ahead forecast horizon. Conversely, COVID-19 tends to shape returns more than volatility over a five-day ahead forecast horizon. Our findings remain intact over the two forecast horizons using the total number of deaths per million as an alternative COVID-19 measure. This evidence supports a new channel of exchange rate return predictability, namely the disease outbreak channel.
CITATION STYLE
Njindan Iyke, B. (2020). The Disease Outbreak Channel of Exchange Rate Return Predictability: Evidence from COVID-19. Emerging Markets Finance and Trade, 56(10), 2277–2297. https://doi.org/10.1080/1540496X.2020.1784718
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