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Mueller, Philippe, Stathopoulos, Andreas and Vedolin, Andrea (2017) International correlation risk. Journal of Financial Economics, 126 (2). pp. 270-299. doi:10.1016/j.jfineco.2016.09.012 ISSN 0304-405X.
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Official URL: http://dx.doi.org/10.1016/j.jfineco.2016.09.012
Abstract
We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Foreign exchange -- Mathematical models, International finance | ||||||||
Journal or Publication Title: | Journal of Financial Economics | ||||||||
Publisher: | Elsevier Science BV | ||||||||
ISSN: | 0304-405X | ||||||||
Official Date: | November 2017 | ||||||||
Dates: |
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Volume: | 126 | ||||||||
Number: | 2 | ||||||||
Page Range: | pp. 270-299 | ||||||||
DOI: | 10.1016/j.jfineco.2016.09.012 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 1 November 2017 | ||||||||
Date of first compliant Open Access: | 22 February 2019 | ||||||||
Funder: | Suntory-Toyota International Centre for Economics and Related Disciplines, Systemic Risk Centre, Economic and Social Research Council (Great Britain) (ESRC) | ||||||||
Grant number: | ES/K002309/1 (ESRC) |
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