The conditional volatility premium on currency portfolios

Joseph Byrne and Ryuta Sakemoto

Journal of International Financial Markets, Institutions and Money, 2021, vol. 74, issue C

Abstract: Our paper examines conditional risk-return relations in a number of currency investment strategies, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk for most currency portfolios. In particular, value and momentum portfolios present risk-return relationships which switch sign, depending upon economic states. The positive relationship for the value portfolio is associated with “flight to quality” periods and the mean reversion for nominal exchange rates during financial crises. The positive relationship for the momentum portfolio is linked to the US and global business cycles and investors require positive compensation for risk in recessions.

Keywords: Systematic risk; Currency carry trade; Momentum; Value; Conditional factor model; Currency variability (search for similar items in EconPapers)
JEL-codes: C12 C58 F3 G11 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:74:y:2021:i:c:s104244312100130x

DOI: 10.1016/j.intfin.2021.101415

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