Systematic Currency Volatility Risk Premia

Andreas Bang Nielsen

Research output: Working paperResearch

Abstract

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.
Original languageEnglish
PublisherSSRN: Social Science Research Network
Number of pages66
DOIs
Publication statusPublished - 20 Apr 2018

Keywords

  • Volatility risk premia
  • Factor models
  • Foreign exchange volatility
  • Currency options
  • Option-Implied betas

Cite this

Bang Nielsen, A. (2018). Systematic Currency Volatility Risk Premia. SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.3171795
Bang Nielsen, Andreas. / Systematic Currency Volatility Risk Premia. SSRN: Social Science Research Network, 2018.
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Bang Nielsen, A 2018 'Systematic Currency Volatility Risk Premia' SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.3171795

Systematic Currency Volatility Risk Premia. / Bang Nielsen, Andreas.

SSRN: Social Science Research Network, 2018.

Research output: Working paperResearch

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Bang Nielsen A. Systematic Currency Volatility Risk Premia. SSRN: Social Science Research Network. 2018 Apr 20. https://doi.org/10.2139/ssrn.3171795