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Expected Currency Returns and Volatility Risk Premia

Jose Ornelas ()

No 454, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper addresses the predictive ability of currency volatility risk premium - the difference between an implied and a realized volatility - over US dollar exchange rates using a time-series perspective. The intuition is that, when risk aversion sentiment increases, the market quickly discounts the currency, and later this discount is “accrued”, leading to a future currency appreciation. Based on two different samples with a diversified set of 32 currencies, I document a positive relationship between currency volatility risk premium and future currency returns. Results remain robust even after controlling for traditional fundamental predictors like Purchase Power Parity and interest rate differential

New Economics Papers: this item is included in nep-fmk
Date: 2017-01
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