Can skewness predict currency excess returns?

This paper investigates whether the skewness of returns is informative about future currency excess returns. We first conduct portfolio-level analyses with and without control variables, such as volatility, liquidity and global foreign exchange (FX) volatility risk. Then, we run regressions at the currency level to examine the predictive ability of skewness. The empirical results indicate a positive and significant relationship between skewness and future currency excess returns. We then compare the skewness strategy with the traditional carry trade and find that skewness still matters after excluding the effects of the carry trade. Our empirical findings are robust to sub samples (emerging, non-Euro and Group of Twenty economies) and different business cycle states. Finally, we find that skewness strategies cannot be enhanced by considering information about currency regimes.