Variance risk premiums in foreign exchange markets |
| |
| Institution: | 1. Bangor Business School, Hen Goleg, College Road, Bangor LL57 2DG, United Kingdom;2. University of Southampton – Highfield Campus, Southampton SO17 1BJ, United Kingdom;3. Cardiff Business School, Aberconway Buidling, Colum Drive, Cardiff CF10 3EU, United Kingdom;1. School of Economics and Management, Beihang University, China;2. School of Finance, Central University of Finance and Economics, China;1. Hitotsubashi University, Japan;2. Bank for International Settlements, Hong Kong Special Administrative Region;3. Bank of Japan, Japan;1. Columbia Business School and NBER, United States;2. European Central Bank, Germany;1. Wisconsin School of Business, Department of Finance, United States;2. Citigroup, United States;1. Department of Economics, University of Melbourne, 111 Barry Street, Melbourne 3053, Australia;2. Melbourne Institute of Applied Economic & Social Research, 111 Barry Street, Melbourne 3053, Australia |
| |
| Abstract: | Based on the theory of static replication of variance swaps we assess the sign and magnitude of variance risk premiums in foreign exchange markets. We find significantly negative risk premiums when realized variance is computed from intraday data with low frequency. As a likely consequence of microstructure effects however, the evidence is ambiguous when realized variance is based on high-frequency data. Common to all estimates, variance risk premiums are highly time-varying and inversely related to the risk-neutral expectation of future variance.When we test whether variance risk premiums can be attributed to classic risk factors or fear of jump risk, we find that conditional premiums remain significantly negative. However, we observe a strong relationship between the size of log variance risk premiums and the VIX, the TED spread and the general shape of the implied volatility function of the corresponding currency pair. Overall, we conclude that there is a separately priced variance risk factor which commands a highly time-varying premium. |
| |
| Keywords: | |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
