International correlation risk

Philippe Mueller (), Andreas Stathopoulos and Andrea Vedolin

Journal of Financial Economics, 2017, vol. 126, issue 2, 270-299

Abstract: We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.

Keywords: Correlation risk; Exchange rates; International finance (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X17302155
Full text for ScienceDirect subscribers only

Related works:
Working Paper: International correlation risk (2017)
Working Paper: International correlation risk (2014)
Working Paper: International correlation risk (2013)
Working Paper: International Correlation Risk (2012)
Working Paper: International Correlation Risk
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:126:y:2017:i:2:p:270-299

DOI: 10.1016/j.jfineco.2016.09.012

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().