Volatility risk premia and exchange rate predictability

Corte, Pasquale Della; Ramadorai, Tarun; Sarno, Lucio

doi:10.1016/j.jfineco.2016.02.015

Cited by 149 publications

(32 citation statements)

References 54 publications

(11 reference statements)

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“…We further consider option-implied information and crash sensitivity from the perspective of quantitative risk management. Specifically, the volatility risk premium (V RP t ) as a measure of hedging demand imbalances (Garleanu, Pedersen, and Poteshman, 2009), and hence can be interpreted as a proxy for (relative) downside insurance cost (Della Corte, Ramadorai, and Sarno, 2013). According to Huang and MacDonald (2013), the skew risk premium (SRP t ) measures the expected change in the probability of UIP to hold, and therefore can be interpreted as a proxy for crash risk premia of investment currencies relative to funding currencies, and the kurtosis risk premium (KRP t ) naturally reflects tail risk premium.…”

Section: Scapegoat Variablesmentioning

confidence: 99%

The term structure of exchange rate predictability: Commonality, scapegoat, and disagreement

Cao

Huang²,

Liu

et al. 2019

Journal of International Money and Finance

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In this paper we study the exchange rate predictability across a range of investment horizons by proposing a generalized (term structure) model to capture the risk premium component of exchange rates with a broad set of variables meanwhile handle both parameter and model uncertainty. We demonstrate the existence of time-varying term-structural effect and model disagreement effect of exchange rate predictors as well as the projections of predictive information over the term structure. We further utilize the time-variation in the probability weighting to identify the scapegoat drivers of customer order flows. Our findings suggest that heterogeneous agents learn to forecast exchange rates and switch trading rules over time, resulting in the dynamic country-specific and global exposures of exchange rates to shortrun non-fundamental risk and long-run business cycle risk. Hedging pressure and liquidity are identified to contain predictive information that is common to a range of forecasting horizons. Policy-related predictors are important for short-run forecasts up to 3 months while crash risk indicators matter for long-run forecasts from 9 months to 12 months. We further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees of 6.5% per annum. The outperformance is mainly due to (i) the relaxing of restrictions imposed on structural parameters via model generalization, and (ii) the use of factor structure to extract common useful information from noisy data and reduce estimation errors.

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Section: Scapegoat Variablesmentioning

confidence: 99%

The term structure of exchange rate predictability: Commonality, scapegoat, and disagreement

Cao

Huang²,

Liu

et al. 2019

Journal of International Money and Finance

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“…The study of the volatility has been applied in different assets clases such as foreign exchange markets, equity, bond and many more (Carr & Wu, 2008;Mueller, Vedolin, & Yen, 2012;Della Corte, Ramadorai, & Sarno, 2016). Among the largest and important financial market in the world is the foreign exchange market, that is why forecasting volatility is relevant to organizations, financial institutions and traders wanting to do risk management strategies (Pilbeam & Langeland, 2015).…”

Section: Theoretical Approachmentioning

confidence: 99%

A New Measure of Volatility Using Induced Heavy Moving Averages

León‐Castro

Espinoza-Audelo

Avilés‐Ochoa

et al. 2019

Technological and Economic Development of Economy

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The volatility is a dispersion technique widely used in statistics and economics. This paper presents a new way to calculate volatility by using different extensions of the ordered weighted average (OWA) operator. This approach is called the induced heavy ordered weighted moving average (IHOWMA) volatility. The main advantage of this operator is that the classical volatility formula only takes into account the standard deviation and the average, while with this formulation it is possible to aggregate information according to the decision maker knowledge, expectations and attitude about the future. Some particular cases are also presented when the aggregation information process is applied only on the standard deviation or on the average. An example in three different exchange rates for 2016 are presented, these are for: USD/MXN, EUR/MXN and EUR/USD

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“…High volatility of the national currency exchange rate is usually regarded as a negative factor for any economy (P. Della Corte, T. Ramadorai, L. Sarno [10]). In the mean time, the case of Turkey proves smaller entities can benefit from high volatility of the foreign exchange rate (C. Tunç, M.N.…”

Section: Contemporary Studies Of the Market Volatilitymentioning

confidence: 99%

Macroeconomic Determinants of the Currency and Stock Market Shocks: A Panel VAR Approach

Borochkin¹

2017

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Importance The article addresses the currency and stock market volatility caused by market participants' perception of macroeconomic news that central banks across opened economy countries take into account when making decisions on changes in the monetary policy. Objectives The study aims to offer a quantitative approach to assessing a reaction of the currency and stock market to macroeconomic news publication. Methods The study employs descriptive statistics methods. Basic calculations rest on the Panel Vector Autoregression method. Results News about changes in interest rates, inflation and industrial production instantly trigger financial market volatility in all analyzed countries. I found volatility spillovers from currency to stock markets and vice versa. The aftermaths of the news-related shocks are absorbed by the market during 3-4 days. Conclusions and RelevanceThe modern monetary policy of central banks implies no immediate measures against inflation spikes, therefore, the reaction of markets to publication of price indices is quite slow as compared to official announcements about interest rate changes. Financial markets respond slowly to publication of important macroeconomic news if the latter can be predicted on the basis of leading indicators.

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Volatility risk premia and exchange rate predictability

Cited by 149 publications

References 54 publications

The term structure of exchange rate predictability: Commonality, scapegoat, and disagreement

The term structure of exchange rate predictability: Commonality, scapegoat, and disagreement

A New Measure of Volatility Using Induced Heavy Moving Averages

Macroeconomic Determinants of the Currency and Stock Market Shocks: A Panel VAR Approach

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