Currency Risk Premiums Redux PDF Download

Author: Federico Calogero Nucera
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Author: Federico Nucera
Publisher:
ISBN:
Category : Assets (Accounting)
Languages : en
Pages : 0

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We study a large currency cross section using asset pricing methods which account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors which resemble (but are not identical to) a strong U.S. “Dollar” factor, and two weak, high Sharpe ratio “Carry” and “Momentum” slope factors. Evidence for an additional “Value” factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium -- mostly relating to volatility, uncertainty and liquidity conditions, rather than macro variables.

Author: Mr.Lorenzo Giorgianni
Publisher: International Monetary Fund
ISBN: 1451845790
Category : Business & Economics
Languages : en
Pages : 40

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This paper challenges the conventional view that foreign exchange risk premiums are small, not volatile, and unrelated to macroeconomic variables. For the Italian lira (1987-94), unconditional risk premiums—constructed using survey data to measure exchange rate expectations—are found to be sizable (relative to the dimension of the forward premium), highly volatile (relative to the variability of the forward bias), and predictable. Estimation of structural models of the risk premium suggests that anticipated fiscal contractions in Italy and lower uncertainty about the future path of fiscal policy are associated with a lower risk premium on lira-denominated assets.

Author: Shaun K. Roache
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 32

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Large fundamental imbalances persist in the global economy, with potential exchange rate implications. This paper assesses whether exchange rate risk is priced across G-7 stock markets. Given the multitude of hedging instruments available, theory suggests that stock market investors should not be compensated for currency risk. However, data covering 33 industry portfolios across seven major stock markets suggest that not only is exchange rate risk priced in many markets, but that it is time-varying and sensitive to currency-specific shocks. With stock market investors typically exhibiting "home bias," this suggests that investors are using equity asset proxies to hedge the exchange rate risks to consumption.

Author: John A. Carlson
Publisher:
ISBN:
Category :
Languages : en
Pages : 42

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This paper presents a theoretical model of exchange-rate determination intended to address the forward premium puzzle. It also explains the empirical observation that risk premiums depend on interest differentials. The model's closed-form solution indicates that currency risk premiums depend on two factors: interest differentials and the current deviation of the exchange rate from its long-run equilibrium. If speculators have an alternative to exchange-rate speculation, then there is no presumption that uncovered interest parity holds even approximately in long-run equilibrium. The model is consistent with existing evidence suggesting that forward premiums are negatively related to rationally expected future exchange rate changes. New empirical evidence is provided in support of the model.

Author: Alastair Graham
Publisher: Routledge
ISBN: 1135957258
Category : Business & Economics
Languages : en
Pages : 134

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The Currency Risk Management series offers readers, researchers, and financial professional a time-tested training tool for understanding and working in the increasingly complex currency markets. This series breaks new ground in simplicity, clarity, and ease of application in risk management practice.

Author: Mr.Reinout De Bock
Publisher: International Monetary Fund
ISBN: 1616353163
Category : Business & Economics
Languages : en
Pages : 58

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Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency?s yield and relationship to broader risks in recent years.

Author: MIKHAIL CHERNOV; MAGNUS DAHLQUIST.
Publisher:
ISBN: 9781638283119
Category : BUSINESS & ECONOMICS
Languages : en
Pages : 0

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Currency Risk Premiums: A Multi-Horizon Perspective reviews the literature on multi-horizon currency risk premiums. It shows how the multi-horizon implications arise from the classic present-value relationship. The authors further show how these implications manifest themselves in the interaction between bond and currency risk premiums. This link is strengthened by explicitly accounting for stochastic discount factors. Information about currency risk premiums at different horizons presents a wealth of new evidence and challenges for existing models.

Author: Chu-Sheng Tai
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This paper studies time-varying price of risk and volatility in Asia-Pacific forward exchange markets in an attempt to see whether currency risk can be a potential source of risk premium to explain forward premium puzzle. To derive a measure of the risk premium, a conditional version of international CAPM (ICAPM) in the absence of PPP is estimated and the parameter restrictions are tested based on asset pricing theories. To incorporate time-varying feature of the risk premium into the model, not only are the second moments of asset returns allowed to change over time by utilizing a parsimonious parameterization of the asymmetric multivariate GARCH with conditionally t-distributed error process (MGARCH-t), but also the prices of risks are permitted to evolve through time based on some predetermined information variables. Estimation results indicate that the not only are currency risks priced, but also change over time. In addition, the explanatory power of the model measured by pseudo-R^2 is relatively high with an average of 38.211%, suggesting that the predicted time-varying forward risk premia are both statistically and economically significant. Finally, both forward premium and its squared are statistically significant in describing the dynamics of currency risk prices, implying the non-linearity of forward risk premium, which sheds a new light in the estimation of international asset pricing model and on the test of forward premium puzzle.

Author: Shaun K. Roache
Publisher:
ISBN:
Category : Banks and banking, Central
Languages : en
Pages : 25

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