The Intertemporal Relation between Expected Return and Risk on Currency

Turan Bali () and Kamil Yilmaz
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Turan Bali: Baruch College

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.

Keywords: Foreign exchange market; ICAPM; High-frequency data; Time-varying risk aversion; Daily realized volatility (search for similar items in EconPapers)
JEL-codes: C13 C22 G12 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009-09, Revised 2009-11
New Economics Papers: this item is included in nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:koc:wpaper:0909

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