Volatility risk premia and exchange rate predictability

• 成果类型: Article
• 署名作者: Della Corte, Pasquale; Ramadorai, Tarun; Sarno, Lucio
• 署名单位: Imperial College London; University of Oxford; City St Georges, University of London; Centre for Economic Policy Research - UK
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2016.02.015
• 发表日期: 2016
• 页码: 21-40
• 关键词: Exchange rates; Volatility risk premium; predictability; Efficient currency portfolios

摘要

We discover a new currency strategy with highly desirable return and diversification properties, which uses the predictive ability of currency volatility risk premia for currency returns. The volatility risk premium the difference between expected realized volatility and model-free implied volatility reflects the costs of insuring against currency volatility fluctuations. The strategy sells high insurance-cost currencies and buys low insurance-cost currencies. A distinctive feature of the strategy's returns is that they are mainly generated by movements in spot exchange rates instead of interest rate differentials. We explore explanations for the profitability of the strategy, which cannot be understood using traditional risk factors. (C) 2016 Elsevier B.V. All rights reserved.