IDEAS home Printed from https://ideas.repec.org/p/wop/calbha/_003.html
   My bibliography  Save this paper

Options and the Currency Risk Premium

Author

Listed:
  • Richard K. Lyons

Abstract

This chapter uses implied volatilities to examine both the existence and form of the currency risk premium. First, I test for “simple efficiency”, under which there is no risk premium and expectations are rational. This involves testing whether implied volatilities predict subsequent excess returns on currency positions. I find they do, a rejection of simple efficiency. More important, since theory links volatility to the risk premium, this provides a stronger basis for interpreting rejection of the joint hypothesis as evidence of a risk premium, as opposed to a violation of rational expectations. I also test a model of the risk premium that specifies an explicit relation between the premium and volatility.

Suggested Citation

  • Richard K. Lyons, 1995. "Options and the Currency Risk Premium," Working Papers _003, University of California at Berkeley, Haas School of Business.
    • Handle: RePEc:wop:calbha:_003
    as

    Download full text from publisher

    File URL: http://haas.berkeley.edu/~eap/Options.DOC
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wop:calbha:_003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/habrkus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.