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The cross-section of currency volatility premia
Authors:Pasquale Della Corte  Roman Kozhan  Anthony Neuberger
Affiliation:1. Imperial College Business School, Imperial College London, Exhibition Rd, London SW7 2AZ, UK;2. Warwick Business School, University of Warwick, Scarman Road, Coventry CV4 7AL, UK;3. Thed Business School, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK;1. Erasmus Scchool of Economics - Burgemeester Oudlaan 50, Erasmus University Rotterdam, Rotterdam PA 3062, the Netherlands;2. Tilburg University - Warandelaan 2, Tilburg AB 5037, the Netherlands;1. Rotterdam School of Management, Erasmus University, Department of Finance, Burgemeester Oudlaan 50, P.O. Box 1738, DR Rotterdam 3000, the Netherlands;2. KU Leuven, Faculty of Economics and Business (FEB), Antwerp Carolus Campus, Korte Nieuwstraat 33, Antwerp 2000, Belgium;3. The Liquid House, Aalmoezenierstraat 13, Antwerp 2000, Belgium;1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia;1. Aalto University School of Business, Ekonominaukio 1, Espoo 02150, Finland;2. Center for Economic Policy Research, 33 Great Sutton Street, London, EC1V 0DX, United Kingdom;3. Research Institute of Industrial Economics, Grevgatan 34, Stockholm SE-102 15, Sweden;4. Dartmouth College, Tuck School of Business, 100 Tuck Hall, Hanover NH 03755, USA;5. National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge MA 02138, USA;1. Haas School of Business, UC Berkeley and NBER, 545 Student Services Building, Berkeley, CA 94720-1900, USA;2. Anderson School of Management, UCLA and NBER, 110 Westwood Plaza, Los Angeles, CA 90095, USA;1. Purdue University, Krannert School of Management, 403W. State Street, West Lafayette, IN 47907, United States;2. Asian Bureau of Finance and Economics Research, NUS Business School, BIZ 2 Storey 4, #04-05 1 Business Link 117592, Singapore;3. European Corporate Governance Institute, c/o the Royal Academies of Belgium, Palace of the Academies, Rue Ducale 1 Hertogsstraat, 1000 Brussels, Belgium;4. National Bureau of Economic Research, 1050 Massachusetts Ave, Cambridge MA 02138, United States;5. University of Alberta, Alberta School of Business, 4-20K Business Building, Edmonton, AB T6G 2R6, Canada
Abstract:We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes–a volatility carry strategy–generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk.
Keywords:
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