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The cross-section of currency volatility premia

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  • Corte, Pasquale Della
  • Kozhan, Roman
  • Neuberger, Anthony

Abstract

We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes–a volatility carry strategy–generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk.

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  • Corte, Pasquale Della & Kozhan, Roman & Neuberger, Anthony, 2021. "The cross-section of currency volatility premia," Journal of Financial Economics, Elsevier, vol. 139(3), pages 950-970.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:3:p:950-970
    DOI: 10.1016/j.jfineco.2020.08.010
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    More about this item

    Keywords

    Currency volatility risk premia; Forward volatility agreement; Foreign exchange volatility; Term structure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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