Currency Returns, Intrinsic Value, and Institutional-strongInvestorstrong.pdfVIP

THE JOURNAL OF FINANCE • VOL. LX, NO. 3 • JUNE 2005 Currency Returns, Intrinsic Value, and Institutional-Investor Flows KENNETH A. FROOT and TARUN RAMADORAI∗ ABSTRACT We decompose currency returns into (permanent) intrinsic-value shocks and (tran- sitory) expected-return shocks. We explore interactions between these shocks, cur- rency returns, and institutional-investor currency flows. Intrinsic-value shocks are: dwarfed by expected-return shocks (yet