Monetary policy and currency variance risk premia

Asad Dossani

Research in International Business and Finance, 2024, vol. 69, issue C

Abstract: I analyze how the stance of monetary policy predicts variance risk premia in the currency market. The stance of monetary policy is measured using the shadow short rate, and two year and ten year bond yields. The stance of U.S. monetary policy predicts currency variance risk premia, after controlling for the stance of the foreign currency’s monetary policy. Contractionary U.S. monetary policy predicts lower currency variance risk premia, consistent with an increase in investor risk aversion. In contrast, the stance of the foreign currency’s monetary policy does not predict currency variance risk premia, after controlling for the stance of U.S. monetary policy.

Keywords: Shadow short rate; Predictability (search for similar items in EconPapers)
JEL-codes: E5 F3 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000813

DOI: 10.1016/j.ribaf.2024.102288

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