TY - UNPB

T1 - Systematic Currency Volatility Risk Premia

AU - Bang Nielsen, Andreas

PY - 2018/4/20

Y1 - 2018/4/20

N2 - I show that volatility risk of the dollar factor - an equally weighted basket of developed U.S. dollar exchange rates - carries a significant risk premium and that it is priced in the cross-section of currency volatility excess returns. The dollar factor volatility risk premium is negative on average with an upward sloping and concave term structure. Consistent with this pattern, I find that dollar factor volatility risk is most significantly priced in the cross-section of volatility excess returns at shorter maturities. A trading strategy that sells (buys) volatility insurance on currencies with high (low) exposure to dollar factor volatility risk delivers high mean excess returns and Sharpe ratios. At shorter maturities, the profitability of this strategy cannot be explained by exposure to traditional currency factors, equity factors, or currency volatility carry factors.

AB - I show that volatility risk of the dollar factor - an equally weighted basket of developed U.S. dollar exchange rates - carries a significant risk premium and that it is priced in the cross-section of currency volatility excess returns. The dollar factor volatility risk premium is negative on average with an upward sloping and concave term structure. Consistent with this pattern, I find that dollar factor volatility risk is most significantly priced in the cross-section of volatility excess returns at shorter maturities. A trading strategy that sells (buys) volatility insurance on currencies with high (low) exposure to dollar factor volatility risk delivers high mean excess returns and Sharpe ratios. At shorter maturities, the profitability of this strategy cannot be explained by exposure to traditional currency factors, equity factors, or currency volatility carry factors.

KW - Volatility risk premia

KW - Factor models

KW - Foreign exchange volatility

KW - Currency options

KW - Option-Implied betas

KW - Volatility risk premia

KW - Factor models

KW - Foreign exchange volatility

KW - Currency options

KW - Option-Implied betas

U2 - 10.2139/ssrn.3171795

DO - 10.2139/ssrn.3171795

M3 - Working paper

BT - Systematic Currency Volatility Risk Premia

PB - SSRN: Social Science Research Network

ER -