IDEAS home Printed from
   My bibliography  Save this paper

Currency Risk and Pricing Kernel Volatility


  • Christopher Telmer

    (Carnegie Mellon University)

  • Batchimeg Sambalaibat

    (Carnegie Mellon University)

  • Federico Gavazzoni

    (Carnegie Mellon University)


A basic tenet of lognormal asset pricing models is that a risky currency is associated with a low pricing kernel volatility. Empirical evidence implies that a risky currency is associated with a relatively high interest rate. Taken together, these two statements associate high-interest-rate currencies with low pricing kernel volatility. We document evidence suggesting that the opposite is true. We approximate the volatility of the pricing kernel with the volatility of the short interest rate. We find that, across currencies, relatively high interest rate volatility is associated with relatively high interest rates. This contradicts the prediction of lognormal models. One possible reason is that our approximation of the volatility of the pricing kernel is inadequate. We argue that this is unlikely, in particular for questions involving currencies. We conclude that lognormal models of the pricing kernel are inadequate for explaining currency risk and that future work should place increased emphasis on higher moments.

Suggested Citation

  • Christopher Telmer & Batchimeg Sambalaibat & Federico Gavazzoni, 2012. "Currency Risk and Pricing Kernel Volatility," 2012 Meeting Papers 558, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:558

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Yang Liu & Mariano Croce & Ivan Shaliastovich & Ric Colacito, 2016. "Volatility Risk Pass-Through," 2016 Meeting Papers 135, Society for Economic Dynamics.
    2. Hanno Lustig & Andreas Stathopoulos & Adrien Verdelhan, 2013. "The Term Structure of Currency Carry Trade Risk Premia," NBER Working Papers 19623, National Bureau of Economic Research, Inc.
    3. Lustig, Hanno & Stathopoulos, Andreas & Verdelhan, Adrien, 2016. "Nominal Exchange Rate Stationarity and Long-Term Bond Returns," Research Papers 3411, Stanford University, Graduate School of Business.
    4. Gurdip Bakshi & Mario Cerrato & John Crosby, 2016. "Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies," Working Papers 2017_01, Business School - Economics, University of Glasgow.
    5. Lustig, Hanno & Roussanov, Nikolai & Verdelhan, Adrien, 2014. "Countercyclical currency risk premia," Journal of Financial Economics, Elsevier, vol. 111(3), pages 527-553.
    6. Thomas A. Maurer & Thuy-Duong Tô & Ngoc-Khanh Tran, 2019. "Pricing Risks Across Currency Denominations," Management Science, INFORMS, vol. 65(11), pages 5308-5336, November.
    7. Fousseni Chabi-Yo & Riccardo Colacito, 2019. "The Term Structures of Coentropy in International Financial Markets," Management Science, INFORMS, vol. 65(8), pages 3541-3558, August.
    8. Evans, Martin, 2020. "Exchange Rates and Liquidity Risk," MPRA Paper 102702, University Library of Munich, Germany.
    9. A. Craig Burnside & Jeremy J. Graveline, 2012. "On the Asset Market View of Exchange Rates," NBER Working Papers 18646, National Bureau of Economic Research, Inc.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:red:sed012:558. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    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: Christian Zimmermann (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.