Variance Risk Premium Differentials and Foreign Exchange Returns

Arash Aloosh

MPRA Paper from University Library of Munich, Germany

Abstract: The uncovered interest rate parity does not hold in the foreign exchange market (UIP puzzle). I use the cross-country variance risk premium differential to measure the excess foreign exchange return. Consequently, similar to Bansal and Shaliastovich (2010), I provide a risk-based explanation for the violation of UIP. The empirical results, based on the monthly data of ten currency pairs among US Dollar, UK Pound, Japanese Yen, Euro, and Swiss Franc, support the model both in-sample and out-of-sample.

Keywords: Consumption growth volatility-of-volatility; Variance risk premium differential; Global variance risk premium; Excess foreign exchange return; UIP (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2011-11-30, Revised 2012-08-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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