Variance Risk Premium Differentials and Foreign Exchange Returns

Arash, Aloosh (2011): Variance Risk Premium Differentials and Foreign Exchange Returns. Published in: EFA Doctoral Tutorial 2012 (18 August 2012)

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumption growth volatility-of-volatility; Variance risk premium differential; Global variance risk premium; Excess foreign exchange return; UIP
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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