Greenwood, RobinSong, Karen2025-09-1820252025-05-222025Song, Karen. 2025. The Peso Perspective: Understanding Risk and Return in Global Currency Markets. Bachelors Thesis, Harvard University Engineering and Applied Sciences.31931587https://dash.harvard.edu/handle/1/42719227The drivers of currency excess returns remain poorly understood despite the foreign exchange market’s size and liquidity. Using five measures of risk — novel text-based measures (from newspaper articles and firm earnings calls) alongside traditional risk indices that capture a country’s economic, financial, and political risk — I show that financial risk is the dominant predictor of volatility in emerging market currency returns, while geopolitical risk is positively associated with excess returns, supporting a risk premium explanation for the profitability of currency trades. Firm-level risk perceptions, especially from foreign firms, outperform political/economic risk in forecasting returns. However, country-specific risks explain only a fraction of exchange rate movements, revealing fundamental limits to forecasting exchange rate movements. The results highlight financial stability as a stronger determinant of risk premia than political uncertainty, with implications for currency speculators and policy-making in emerging economies.application/pdfenforeign exchangeinternational financemarket efficiencyEconomicsFinanceThesis or Dissertation2025-09-18