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Intertemporal Risk-Return Trade-off in Foreign Exchange Rates

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  • Charlotte Christiansen

    ()
    (CREATES, School of Economics and Management, Aarhus University)

Abstract

We investigate the intertemporal risk-return trade-off of foreign ex- change (FX) rates for ten currencies quoted against the USD. For each currency, we use three risk measures simultaneously that pertain to that currency; its re- alized volatility, its realized skewness, and its value-at-risk. We apply monthly FX excess returns and monthly FX risk measures calculated from daily ob- servations. We find that there is a positive and signi?cant contemporaneous risk-return trade-off for most currencies. There is no evidence of noncontem- poraneous risk-return trade-off. The risk-return trade-off changes during the recent financial crisis in that it becomes nonexistent for several currencies and negative for others.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-20.

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Length: 25
Date of creation: 05 May 2010
Date of revision:
Handle: RePEc:aah:create:2010-20

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Foreign exchange rates; Risk-return trade-off; Realized volatility; Realized skewness; Value-at-risk; Financial crisis;

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References

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  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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  7. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
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Cited by:
  1. Doukas, John A. & Zhang, Hao, 2013. "The performance of NDF carry trades," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 172-190.
  2. 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.

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