The Conditional Volatility Premium on Currency Portfolios

Byrne, Joseph and Sakemoto, Ryuta (2021): The Conditional Volatility Premium on Currency Portfolios.

Abstract

Our paper examines conditional risk-return relations in a cross-section of currency portfolios, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk: investors require a positive risk premium in many, but by no means all, time periods or investment strategies. We find that value and momentum portfolios obtained a positive risk premium during the financial crisis. Important economic states underpinning exchange rate risks include the US and global business cycles. Finally, we uncover that the risk-return relation on the momentum portfolio is counter-cyclical.

• Item Type: MPRA Paper
• Language: English
• Keywords: Systematic Risk; Currency Carry Trade; Momentum; Value; Conditional Factor Model; Currency Variability
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; F - International Economics > F3 - International Finance; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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