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The cross-section of currency volatility premia

Pasquale Della Corte, Roman Kozhan and Anthony Neuberger

Journal of Financial Economics, 2021, vol. 139, issue 3, 950-970

Abstract: We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes–a volatility carry strategy–generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk.

Keywords: Currency volatility risk premia; Forward volatility agreement; Foreign exchange volatility; Term structure (search for similar items in EconPapers)
JEL-codes: F31 F37 G01 G11 G12 G13 G15 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jfineco.2020.08.010

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Handle: RePEc:eee:jfinec:v:139:y:2021:i:3:p:950-970