Countercyclical Currency Risk Premia
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Countercyclical Currency Risk Premia
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Author : Hanno Lustig
language : en
Publisher:
Release Date : 2010
Countercyclical Currency Risk Premia written by Hanno Lustig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with Economics categories.
Currency excess returns are predictable, more than stock returns, and about as much as bond returns. The average forward discount of the dollar against developed market currencies is the best predictor of average foreign currency excess returns earned by U.S. investors on a long position in a large basket of foreign currencies and a short position in the dollar. The predicted excess returns on baskets of foreign currency are strongly counter-cyclical because they inherit the cyclical properties of the average forward discount. This counter-cyclical dollar risk premium compensates U.S. investors for taking on U.S.-specific risk in foreign exchange markets by shorting the dollar. Macroeconomic variables such as the rate of U.S. industrial production growth increase the predictability of average foreign currency excess returns even when controlling for the forward discount.
Countercyclical Currency Risk Premia
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Author : Hanno N. Lustig
language : en
Publisher:
Release Date : 2016
Countercyclical Currency Risk Premia written by Hanno N. Lustig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
We describe a novel currency investment strategy, the 'dollar carry trade,' which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for taking on aggregate risk by shorting the dollar in bad times, when the U.S. price of risk is high. The counter-cyclical variation in risk premia leads to strong return predictability: the average forward discount and U.S. industrial production growth rates forecast up to 25% of the dollar return variation at the one-year horizon. The estimated model implies that the variation in the exposure of U.S. investors to world-wide risk is the key driver of predictability.
Currency Risk Premia In Global Stock Markets
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Author : Shaun K. Roache
language : en
Publisher: International Monetary Fund
Release Date : 2006-08
Currency Risk Premia In Global Stock Markets written by Shaun K. Roache and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006-08 with Business & Economics categories.
Large fundamental imbalances persist in the global economy, with potential exchange rate implications. This paper assesses whether exchange rate risk is priced across G-7 stock markets. Given the multitude of hedging instruments available, theory suggests that stock market investors should not be compensated for currency risk. However, data covering 33 industry portfolios across seven major stock markets suggest that not only is exchange rate risk priced in many markets, but that it is time-varying and sensitive to currency-specific shocks. With stock market investors typically exhibiting "home bias," this suggests that investors are using equity asset proxies to hedge the exchange rate risks to consumption.
Foreign Exchange Risk Premium
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Author : Mr.Lorenzo Giorgianni
language : en
Publisher: International Monetary Fund
Release Date : 1997-04-01
Foreign Exchange Risk Premium written by Mr.Lorenzo Giorgianni and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997-04-01 with Business & Economics categories.
This paper challenges the conventional view that foreign exchange risk premiums are small, not volatile, and unrelated to macroeconomic variables. For the Italian lira (1987-94), unconditional risk premiums—constructed using survey data to measure exchange rate expectations—are found to be sizable (relative to the dimension of the forward premium), highly volatile (relative to the variability of the forward bias), and predictable. Estimation of structural models of the risk premium suggests that anticipated fiscal contractions in Italy and lower uncertainty about the future path of fiscal policy are associated with a lower risk premium on lira-denominated assets.
Currency Risk Premia In Global Stock Markets
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Author : Shaun K. Roache
language : en
Publisher:
Release Date : 2006
Currency Risk Premia In Global Stock Markets written by Shaun K. Roache and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Banks and banking, Central categories.
Common Risk Factors In Currency Markets
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Author : Hanno Lustig
language : en
Publisher:
Release Date : 2008
Common Risk Factors In Currency Markets written by Hanno Lustig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Foreign exchange futures categories.
"Currency excess returns are highly predictable, more than stock returns, and about as much as bond returns. In addition, these predicted excess returns are strongly counter-cyclical. The average excess returns on low interest rate currencies are 4.8 percent per annum smaller than those on high interest rate currencies after accounting for transaction costs. We show that a single return-based factor, the return on the highest minus the return on the lowest interest rate currency portfolios, explains the cross-sectional variation in average currency excess returns from low to high interest rate currencies. This evidence suggests currency risk premia are large and time-varying. In a simple affine pricing model, we show that the high-minus-low currency return measures the component of the stochastic discount factor innovations that is common across countries. To match the carry trade returns in the data, low interest rate currencies need to load more on this common innovation when the market price of global risk is high"--National Bureau of Economic Research web site
Currency Risk Premia In Global Stock Market
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Author : Shaun K. Roache
language : en
Publisher:
Release Date : 2006
Currency Risk Premia In Global Stock Market written by Shaun K. Roache and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with categories.
Currency Risk Premia From A Swiss Perspective
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Author : Phoebe Liu
language : en
Publisher:
Release Date : 2011
Currency Risk Premia From A Swiss Perspective written by Phoebe Liu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
Sovereign Risk Currency Risk And Corporate Balance Sheets
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Author : Wenxin Du
language : en
Publisher:
Release Date : 2016
Sovereign Risk Currency Risk And Corporate Balance Sheets written by Wenxin Du and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.
The Cross Section Of Foreign Currency Risk Premia And Consumption Growth Risk
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Author : Craig Burnside
language : en
Publisher:
Release Date : 2007
The Cross Section Of Foreign Currency Risk Premia And Consumption Growth Risk written by Craig Burnside and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with Consumption (Economics) categories.
"Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk, " yet these excess returns are all approximately uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the returns. Their positive assessment results from allowing for a large constant in the model, and from ignoring sampling uncertainty in estimated betas used as explanatory variables in cross-sectional regressions that determine estimated consumption risk premia."--abstract.