Expected Currency Returns and Volatility Risk Premia

Jose Ornelas

No 454, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper addresses the predictive ability of currency volatility risk premium - the difference between an implied and a realized volatility - over US dollar exchange rates using a time-series perspective. The intuition is that, when risk aversion sentiment increases, the market quickly discounts the currency, and later this discount is “accrued”, leading to a future currency appreciation. Based on two different samples with a diversified set of 32 currencies, I document a positive relationship between currency volatility risk premium and future currency returns. Results remain robust even after controlling for traditional fundamental predictors like Purchase Power Parity and interest rate differential.

Date: 2017-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Expected currency returns and volatility risk premia (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:454

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