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Expected currency returns and volatility risk premia

Jose Ornelas ()

The North American Journal of Economics and Finance, 2019, vol. 49, issue C, 206-234

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 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)
Date: 2019
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Working Paper: Expected Currency Returns and Volatility Risk Premia (2017) Downloads
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DOI: 10.1016/j.najef.2019.03.015

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Handle: RePEc:eee:ecofin:v:49:y:2019:i:c:p:206-234