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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 (39)

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Working Paper: International correlation risk (2017) Downloads
Working Paper: International correlation risk (2014) Downloads
Working Paper: International correlation risk (2013) Downloads
Working Paper: International Correlation Risk (2012) Downloads
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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

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