Semivariance and semiskew risk premiums in currency markets

José Da Fonseca and Edem Dawui

Journal of Futures Markets, 2021, vol. 41, issue 3, 290-324

Abstract: Using a model‐free methodology, variance, and skew swaps are extracted from currency options for several foreign exchange rates. These swaps are decomposed into semivariance and semiskew swaps and can also be used to define the variance‐skew swap. The decomposed “up” and “down” semivariance swaps, the “down” semiskew swap and the variance‐skew swap explain well the currency excess return. These properties remain valid when considering the prediction of the currency excess return. Lastly, trimming these variables does not affect the results implying that extreme values of the distribution convey little information regarding the evolution of the currency excess return.

Date: 2021
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