Expected currency returns and volatility risk premia
José Renato Haas Ornelas
The North American Journal of Economics and Finance, 2019, vol. 49, issue C, 206-234
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 30 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.
Keywords: Currency return predictability; Volatility risk premium (search for similar items in EconPapers)
JEL-codes: G12 G15 G17 F31 F37 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:49:y:2019:i:c:p:206-234
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