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Variance Risk Premium Differentials and Foreign Exchange Returns

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  • Arash, Aloosh

Abstract

The uncovered interest rate parity does not hold in the foreign exchange market (UIP puzzle). I use the cross-country variance risk premium differential to measure the excess foreign exchange return. Consequently, similar to Bansal and Shaliastovich (2010), I provide a risk-based explanation for the violation of UIP. The empirical results, based on the monthly data of ten currency pairs among US Dollar, UK Pound, Japanese Yen, Euro, and Swiss Franc, support the model both in-sample and out-of-sample.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40829.

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Date of creation: 30 Nov 2011
Date of revision: 18 Aug 2012
Handle: RePEc:pra:mprapa:40829

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Keywords: Consumption growth volatility-of-volatility; Variance risk premium differential; Global variance risk premium; Excess foreign exchange return; UIP;

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References

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Cited by:
  1. Juan M. Londono & Hao Zhou, 2012. "Variance risk premiums and the forward premium puzzle," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1068, Board of Governors of the Federal Reserve System (U.S.).

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