Uncertainty, Curreny Exess Returns, and Risk Reversals
Lucas F. Husted,
John Rogers () and
Bo Sun ()
No 1196, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
In this paper we provide strong evidence that heightened uncertainty in the U.S. real economy or financial markets significantly raises excess returns to the currency carry trade. We posit that this works through the influence of uncertainty on global investors' risk preferences. Macro and financial uncertainty also lower foreign exchange risk reversals, an effect that is particularly strong for high interest rate portfolios. Our results are consistent with the idea that an increase in uncertainty regarding the U.S. economy or financial markets increases investors' risk aversion, which in turn drives up the expected returns and the cost of protection against crash risk in the FX market.
Keywords: Exchange rates; Uncovered interest parity; Uncertainty (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Pages: 32 pages
New Economics Papers: this item is included in nep-ifn and nep-upt
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Journal Article: Uncertainty, currency excess returns, and risk reversals (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1196
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