Differences in beliefs and currency risk premiums☆

Beber, Alessandro; Breedon, Francis; Buraschi, Andrea

doi:10.1016/j.jfineco.2010.07.001

Cited by 99 publications

(44 citation statements)

References 57 publications

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“…This is consistent with empirical evidence showing that heterogeneous beliefs are an important determinant of the shape of the implied volatility smile in currency options. See Beber, A., Buraschi, A., and Breedon, F. (2010).…”

Section: Analogy Based Valuation Of Currency Optionsmentioning

confidence: 99%

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Analogy Based Valuation of Currency Options

Siddiqi

2015

SSRN Journal

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Section: Analogy Based Valuation Of Currency Optionsmentioning

confidence: 99%

“…Survey evidence clearly suggests that people hold diverse beliefs regarding exchange rate movements (see the dataset in Beber et al (2010)). Furthermore, these diverse beliefs are biased as average expectation points to an appreciation when the forward rate suggests a depreciation and vice-versa.…”

Section: The Implied Volatility Smilementioning

confidence: 99%

Analogy Based Valuation of Currency Options

Siddiqi

2015

SSRN Journal

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“…Weekly bid-ask yields and prices for euro-and usd-denominated bonds for four maturity buckets (1-3 years, 3-6 years, 6-9 years and 9-15 years) are retrieved from Bloomberg for the three largest EM sovereign issuers who issued in dual currencies: Turkey, Brazil and Mexico. 9 It must be noted that these countries are the only ones that issued sufficient amount of bonds across both currencies during the given time interval. Characteristics of bonds are collected from Reuters 3000 EXtra: all bonds have fixed coupon rates and are neither callable, puttable, structured nor convertible.…”

Section: Eurobond Yieldsmentioning

confidence: 99%

The Dynamics of Limits to Arbitrage: An Empirical Investigation

2012

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We study empirically the dynamic properties of the limits to arbitrage in the sovereign bond market around a period of market distress. The recent credit crisis offers a unique opportunity to investigate the economic causes of limits to arbitrage. We consider markets that were liquid pre-crisis, and use pairs of sovereign bonds that have been issued in two foreign currencies, i.e. usd and euro. A simple theoretical arbitrage relationship links their credit spreads. While these bounds are within bid/ask spreads during the normal time, they are severely violated during periods of financial stress. As an example, in December 2008Brazil euro-denominated credit spreads on 10-year Eurobonds were nearly 35% higher than the same credit risk denominated in usd. We construct an empirical proxy of limits to arbitrage and run a comprehensive investigation about its economic and behavioral drivers. We find that limits to arbitrage are time-varying and state-dependent. Given that the 2008 Crisis went through two distinct phases (i.e. liquidity crunch and credit crisis), our findings suggest that while sentiment risk and subjective uncertainty affect the first phase, it is funding risk that plays a central role. After the collapse of Lehman Brothers, however, perception of tail event risk and fundamental-related macro risks drive the dynamics of the limits to arbitrage.

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“…One of the main bene…ts of focusing our analysis on the foreign exchange market is that our results will not be a¤ected by short sale constraints. This reason was also brought forward by Beber et al (2010) for studying the foreign exchange market, and by Carlin et al (2012) for studying the MBS market.…”

Section: Introductionmentioning

confidence: 99%