Properties of Foreign Exchange Risk Premiums
By Lucio Sarno, Paul Schneider, Christian Wagner. 2012
131 citations recorded by the source corpus.
We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.
View Paper: https://www.semanticscholar.org/paper/5238cb0a59ce8dc09c6466e402c8f9e328bb414c
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Citations in the corpus
- Currency Momentum Strategies (2012, unknown): “…A, shows results from univariate time-series regressions of momentum returns on various risk factors or business cycle state variables (see, e.g., Burnside, Eichenbaum, Kleshchelski, and Rebelo, 2011; Sarno, Schneider, and Wagner, 2012, for similar regressions in the context of currency returns).”
- The Cross-Section of Credit Risk Premia and Equity Returns (2013, methodology): “Similarly to Vassalou and Xing (2004) we use 10E−4 as our tolerance level.”
- On financial risk and the safe haven characteristics of Swiss franc exchange rates (2015, background): “A potential explanation for the lack of empirical support is the presence of a risk premium required by market participants for a foreign currency investment (e.g. Bansal and Shaliastovich, 2010; Farhi and Gabaix, 2011; Lustig and Verdelhan, 2006, 2007; Lustig et al., 2011; Menkhoff et al., 2012; Ra”