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Do foreign exchange risk premiums relate to the volatility in the foreign exchange and equity markets?

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  • Christine Jiang
  • Thomas Chiang

Abstract

Empirical tests are performed to examine whether foreign exchange excess returns for the British pound, Canadian dollar, Deutsche mark, and Japanese yen are related to volatility in the currency market and volatility in the stock markets. Our results indicate that volatility (measured by standard deviation and variance) from currency markets is significant in explaining the excess returns, suggesting that the excess returns are indeed reward for risk-taking. In addition, shocks in equity markets are found to have a significant impact on currency risk premium as well. In some cases, we find nonlinearity in the risk premium. Finally, our results emerged from Glosten, Jagannathan, Runkle's model (Journal of Finance,48 (5), 1993) suggest that risk premiums for each currency tend to respond to positive and negative shocks differently.

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  • Christine Jiang & Thomas Chiang, 2000. "Do foreign exchange risk premiums relate to the volatility in the foreign exchange and equity markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 95-104.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:95-104
    DOI: 10.1080/096031000331969
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    References listed on IDEAS

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    1. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    2. Backus, David K & Gregory, Allan W & Telmer, Chris I, 1993. "Accounting for Forward Rates in Markets for Foreign Currency," Journal of Finance, American Finance Association, vol. 48(5), pages 1887-1908, December.
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    Cited by:

    1. Herrmann, Sabine & Jochem, Axel, 2003. "Die internationale Intregration der Devisenmärkte in den mittel- und osteuropäischen Beitrittsländern: Spekulative Effizienz, Transaktionskosten und Wechselkursprämien," Discussion Paper Series 1: Economic Studies 2003,08, Deutsche Bundesbank.
    2. WenShwo Fang & Stephen M. Miller, 2002. "Dynamic Effects of Currency Depreciation on Stock Market Returns during the Asian Financial Crisis," Working papers 2002-31, University of Connecticut, Department of Economics.
    3. Chiang, Thomas C. & Kim, Doseong & Lee, Euiseong, 2006. "Country-fund discounts and risk: Evidence from stock market volatility and macroeconomic volatility," Journal of Economics and Business, Elsevier, vol. 58(4), pages 303-322.
    4. Thomas Chiang & Sheng-Yung Yang, 2005. "International Asset Excess Returns and Multivariate Conditional Volatilities," Review of Quantitative Finance and Accounting, Springer, vol. 24(3), pages 295-312, May.
    5. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2008. "Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience," Working papers 2008-49, University of Connecticut, Department of Economics.
    6. Sato, Ayano & Nakata, Hayato & Percy, Jay, 2024. "Time-variant safe haven currencies," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 316-328.
    7. Stefan Trück & Rafał Weron, 2016. "Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 587-611, June.
    8. Ana Filipa Carvalho & Jose Sa da Costa & Jose Assis Lopes, 2006. "A systematic modelling strategy for futures markets volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 16(11), pages 819-833.
    9. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.
    10. Kato, Mika & Proaño, Christian R. & Semmler, Willi, 2018. "Does international-reserves targeting decrease the vulnerability to capital flights?," Research in International Business and Finance, Elsevier, vol. 44(C), pages 64-75.

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