Forward-looking Currency Betas

Andreas Bang Nielsen

Research output: Working paperResearch

Abstract

I propose a model-free method to derive forward-looking betas to currency portfolios from cross-pair currency options. Using the dollar factor - an equal-weighted basket of foreign currencies against the U.S. dollar - as the systematic factor, I find that these option-implied betas are significantly better predictors of realized betas and currency excess returns compared to traditional rolling window betas. Constructing portfolios based on option-implied betas leads to a significantly positive relation between ex-ante betas and ex-post portfolio returns, whereas there is an insignificant relation when rolling window betas are used.
Original languageEnglish
PublisherSSRN: Social Science Research Network
Number of pages58
DOIs
Publication statusPublished - 20 Apr 2018

Keywords

  • Exchange rate risk premiums
  • Factor models
  • Currency options
  • Option-Implied betas
  • Foreign exchange volatility

Cite this

Bang Nielsen, A. (2018). Forward-looking Currency Betas. SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.3076009