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International correlation risk

Philippe Mueller, Andreas Stathopoulos and Andrea Vedolin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We document that cross-sectional FX correlation disparity is countercyclical, as exchange rate pairs with high average correlation become more correlated in bad times whereas pairs with low average correlation become less correlated. We show that currencies that perform badly (well) during periods of high cross-sectional disparity in conditional FX correlation yield high (low) average excess returns, suggesting that correlation risk is priced in currency markets. Furthermore, we find a negative cross-sectional relationship between average FX correlations and average FX correlation risk premia. Finally, we propose a no-arbitrage model that can match salient properties of FX correlations and correlation risk premia.

Keywords: Correlation risk; carry trade; international finance; exchange rates. (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2014-12-04
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://eprints.lse.ac.uk/60955/ Open access version. (application/pdf)

Related works:
Journal Article: International correlation risk (2017) Downloads
Working Paper: International correlation risk (2017) Downloads
Working Paper: International correlation risk (2013) Downloads
Working Paper: International Correlation Risk (2012) Downloads
Working Paper: International Correlation Risk Downloads
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