Download or read book Sources of risk in currency returns written by Mikhail Chernov and published by . This book was released on 2012 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Currency Risks and Returns written by Jingyi Ren and published by . This book was released on 2019 with total page 175 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 11 proposes using foreign exchange rate currency options with different strike prices and maturities to capture both currency risks and expectations, for helping understand currency return dynamics. We show that currency returns, which are notoriously difficult to model empirically, are well-explained by the term structures of forward premia and options-based measures of FX expectations and risk. Although this finding is to be expected, expectations and risk have been largely ignored in empirical exchange-rate modeling. Using daily options data for six major currency pairs, we first show that currency options-implied standard deviation, skewness, and kurtosis consistently improve the explanatory power of quarterly currency returns than a standardized UIP regression. We then show that adding term structure information of options-implied moments further improves the explanatory power. Our results highlight the importance of expectations and risk in explaining currency returns and suggest that this information may be particularly useful during a crisis period. Chapter 2 studies the term structure of currency risk using FX options data, and finds it able to explain the cross-sectional variation of currency excess returns. With the tool of a new FX risk index, "FCX", I look into currency risk term structure and measure its shape by level and slope. I consistently find that for currencies paired by US dollars, the term structure of currency risk is flat at a low level prior to the 2008 crisis, upward-sloping after the crisis and peaks at a high level with a prominently negative slope during the crisis. This work is believed to be new in the currency research field. I then use this information to build trading strategies, earning a profit by longing currencies with the highest level or slope and shorting ones with the lowest level or slope. The profit by sorting slope is significantly high and robust to the 2008 crisis period, with a low correlation to the Carry Trade return, suggesting extra information in risk than the interest rate. Next, I extract global risk factors by level and slope to help understand the currency excess return, a long-lasting puzzle. The global risk factor by level substantially improves the cross-sectional explanatory power in currency excess returns compared to Lustig et al. (2011). Furthermore, I show that there is certain high risk corresponding to a high level and low slope, and high interest rate currency earns returns co-varying negatively to this risk, implying that it is a risky asset and thus requires a high risk premium, which explains the Carry Trade return well. Chapter 32 explores the possible macroeconomic connection in currency markets through the channel of FX risk term structure. There is a consensus in the literature that exchange rates are empirically “disconnected” from fundamentals, but a possible theoretical insight is that macroeconomic volatility shocks induce time-varying risks in the exchange rates. This chapter empirically investigates the connection between macroeconomic fundamentals and time-varying currency risks captured by the FX risk term structure, following the main findings of chapters 1 and 2. This chapter use both a small dataset of directly observable, country-specific key macroeconomic and international variables implied by exchange rate structural modeling and a small number of macroeconomic factors constructed from a large dataset of 126 U.S. macroeconomic series by principal component analysis. We perform a VAR analysis to examine impulse responses of FX risk term structure to the shocks of macroeconomic events and find that production variables can generate a relatively consistent and systematic impact pattern, which suggests potential macroeconomic connection. We also perform a direct single regression, regressing the 126 macroeconomic series of eight different groups on the FX risk term structure and apply the group LASSO technique for variable selection. Variables among both macroeconomic fundamentals and financial series are commonly selected, which suggests that financial markets’ co-movements also exist besides potential macroeconomic connection.

Download or read book Foreign Exchange Intervention Rules for Central Banks A Risk based Framework written by Romain Lafarguette and published by International Monetary Fund. This book was released on 2021-02-12 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

Download or read book The Behavior of Currencies during Risk off Episodes written by Mr.Reinout De Bock and published by International Monetary Fund. This book was released on 2013-01-11 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency?s yield and relationship to broader risks in recent years.

Download or read book Foreign Exchange Order Flow as a Risk Factor written by Craig Burnside and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to provide direct measures of buying and selling pressure related to carry trading and momentum strategies. We find that they appear to be good proxies for currency crash risk. Additionally, we show that the association between our order-flow factors and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

Download or read book Managing Global Financial and Foreign Exchange Rate Risk written by Ghassem A. Homaifar and published by John Wiley & Sons. This book was released on 2003-12-22 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive guide to managing global financial risk From the balance of payment exposure to foreign exchange and interest rate risk, to credit derivatives and other exotic options, futures, and swaps for mitigating and transferring risk, this book provides a simple yet comprehensive analysis of complex derivatives pricing and their application in risk management. The risk posed by foreign exchange transactions stems from the volatility of the exchange rate, the volatility of the interest rates, and factors unique to individual companies which are interrelated. To protect and hedge against adverse currency and interest rate changes, multinational corporations need to take concrete steps for mitigating these risks. Managing Global Financial and Foreign Exchange Rate Risk offers a thorough treatment of price, foreign currency, and interest rate risk management practices of multinational corporations in a dynamic global economy. It lays out the pros and cons of various hedging instruments, as well as the economic cost benefit analysis of alternative hedging vehicles. Written in a detailed yet user–friendly manner, this resource provides treasurers and other financial managers with the tools they need to manage their various exposures to credit, price, and foreign exchange risk. Managing Global Financial and Foreign Exchange Rate Risk covers various swaps in this geometrically growing field with notional principal in excess of $120 trillion. From caplet and corridors to call and put swaptions this book covers the micro structure of the swaps, options, futures, and foreign exchange markets. From credit default swap and transfer and convertibility options to asset swap switch and weather derivatives this book illustrates their simple pricing and application. To show real-world examples, each chapter includes a case study highlighting a specific problem, as well as a set of steps to solve it. Numerous charts accompanied with actual Wall Street figures provide the reader with the opportunity to comprehend and appreciate the role and function of derivatives, which are often misunderstood in the financial market. This detailed resource will guide the individual, government and multinational corporations safely through the maze of various exposures. A must-read for treasures, controllers, money mangers, portfolio managers, security analyst and academics, Managing Global Financial and Foreign Exchange Rate Risk represents an important collection of up-to-date risk management solutions. Ghassem A. Homaifar is a professor of financial economics at Middle Tennessee State University. He has Master of Science in Industrial Management from State University of New York at Stony Brook and PhD in Finance from University of Alabama in 1982. He is the author of numerous articles that have appeared in the Journal of Risk and Insurance, Journal of Business Finance and Accounting, Weltwirtschsftliches Archiv Review of World Economics, Advances in Futures and Options Research,Applied Financial Economics, Applied Economics, International Economics, and Global Finance Journal.

Download or read book Macroeconomic Sources of Forex Risk written by Peter N. Smith and published by . This book was released on 2002 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Exploring Currency Risk Factors Via Corridor Implied Volatility and Its Term Structures Dynamics During Crisis written by Jingyi Li and published by . This book was released on 2020 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper extends the application of corridor implied volatility by Andersen et al. (2015) to currency market, empirically measuring currency risks at multiple horizons, and finds its term structure contains useful information, both for profitable trading strategies and for common risk factors constructions on the basis of Lustig et al. (2011). I consistently find that for currencies paired by US dollars, the term structure of currency risk is flat at a low level prior to the 2008 crisis, upward-sloping after the crisis and peaks at a high level with a prominently negative slope during the crisis. This work is believed to be new in the currency research field. I then use this information to build trading strategies, earning a profit by longing currencies with the highest level or slope and shorting ones with the lowest level or slope. The profit by sorting slope is significantly high and robust to the 2008 crisis period, with a low correlation to the Carry Trade return, suggesting extra information in risk than the interest rate. Next, I extract global risk factors by level and slope to help understand the currency excess return, a long-lasting puzzle. The global risk factor by level substantially improves the cross-sectional explanatory power in currency excess returns compared to Lustig et al. (2011). Furthermore, I show that there is certain high risk corresponding to a high level and low slope, and high interest rate currency earns returns co-varying negatively to this risk, implying that it is a risky asset and thus requires a high risk premium, which explains the Carry Trade return well.

Download or read book Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns written by Irina Zviadadze and published by . This book was released on 2016 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: I quantify the risk-return relationship in the foreign-exchange (FX) market across different countries and investment horizons by focusing on the role of multiple sources of consumption risk. I estimate a flexible structural model of the joint dynamics of US aggregate consumption, inflation, nominal yield, and stochastic variance with cross-equation restrictions implied by recursive preferences. I identify four sources of consumption risk: short-run, long-run, inflation, and variance shocks. The long-run consumption risk plays a prominent role in the FX market: it contributes to the spread in returns between high and low interest rate currencies across multiple investment horizons from one to five quarters. The short-run consumption risk affects currencies only at the quarterly horizon, where it explains 40% of the spread. The difference in returns between high and low yield currencies disappears for horizons longer than four quarters.

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book International Investments in Private Equity written by Peter Klaus Cornelius and published by Academic Press. This book was released on 2011-02-17 with total page 329 pages. Available in PDF, EPUB and Kindle. Book excerpt: How can private equity investors exploit investment opportunities in foreign markets? Peter Cornelius uses a proprietary database to investigate and describe private equity markets worldwide, revealing their levels of integration, their risks, and the ways that investors can mitigate those risks. In three major sections that concentrate on the risk and return profile of private equity, the growth dynamics of discrete markets and geographies, and opportunities for private equity investments, he offers hard-to-find analyses that fill knowledge gaps about foreign markets. Observing that despite the progressive dismantling of barriers investors are still home-biased, he demonstrates that a methodical approach to understanding foreign private equity markets can take advantage of the macroeconomic and structural factors that drive supply and demand dynamics in individual markets. Foreword by Josh Lerner Teaches readers how to investigate and analyze foreign private equity markets Forecasts private equity investment opportunities via macroeconomic and structural factors in individual markets Draws on data from a proprietary database covering 250 buyout and VC funds and 7,000 portfolio companies

Download or read book Currency Returns in Different Time Zones written by Zhengyang Jiang and published by . This book was released on 2019 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: European currencies have positive average returns during US business hours and negative average returns during foreign business hours. I propose a risk-based explanation: Because news about US growth prospects arrives mostly during US business hours, US investors require higher risk premia to hold risky foreign currencies in these hours. Consistent with this argument, I find the difference in a currency's returns between US and foreign business hours widens if the currency has a higher risk exposure, and when its exchange rate becomes more volatile. These results connect currency returns in different time zones to currency risk premia observable at lower frequencies, and support asset pricing models with recursive preferences and long-run risks.

Download or read book U S Dollar Currency Premium in Corporate Bonds written by John Caramichael and published by International Monetary Fund. This book was released on 2021-07-12 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We isolate a U.S. dollar currency premium by comparing corporate bonds issued in the dollar and the euro by firms o utside t he U .S. a nd e uro a rea. We make s everal empirical observations that dissect the perceived advantage of borrowing in the dollar. First, while the dollar dominates global debt issuance, borrowing costs in the dollar are more expensive without a currency hedge and about the same with a currency hedge when compared to the euro. This observed parity in currency-hedged corporate borrowing stands in contrast to the persistent deviation from covered interest parity in risk-free rates. Second, we observe a dollar safety premium in relative hedged borrowing costs, found in the subset of bonds with high credit ratings and short maturities, attributes similar to those of safe sovereigns. Finally, we find that firms flexibly adjust the currency mix of their debt issuance depending on the relative borrowing cost between dollar and euro debt. In sum, the disproportionate demand for U.S. dollar debt is reflected in higher issuance volumes that drive up the currency hedged dollar borrowing costs such that at the margin they equate to euro borrowing costs.

Download or read book Foreign Exchange Exposure on the Spanish Stock Market written by Pedro Martínez-Solano and published by . This book was released on 2000 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the foreign exchange exposure of a sample of 71 non financial companies quoted on the Spanish Stock Exchange Market between January 1992 and December 1997. The level of exposure was obtained from time-series regressions between monthly returns of firms or portfolios, as a dependent variable and the monthly market return and the nominal effective exchange-rate change of the Spanish currency as independent variables. The second part of our study was dedicated to the analysis of levels of exports, imports and foreign debt as possible explanatory factors of exchange rate risk exposure, as well as a study of effects of foreign currency hedging, measured through proxies, on the levels of economic exposure. Then, a cross-sectional regression between the exposure coefficients, as a dependent variable, and the previous factors as independent variables was carried out. The results indicate the existence of economic exposure in about twenty percent of companies and that exports and imports are decisive factors in the level of economic exposure to exchange rate risk. Exports have a positive effect on returns as a result of the exchange rate changes, whereas imports have a negative effect. Furthermore, the results suggest that economic exposure is inversely related to the size of firms and directly with Forex adjustment, which have been used as foreign currency hedging proxy; these results would seem to confirm that foreign currency hedging reduces exchange- rate exposure.

Download or read book The Microstructure of Foreign Exchange Markets written by Jeffrey A. Frankel and published by University of Chicago Press. This book was released on 2009-05-15 with total page 358 pages. Available in PDF, EPUB and Kindle. Book excerpt: The foreign exchange market is the largest, fastest-growing financial market in the world. Yet conventional macroeconomic approaches do not explain why people trade foreign exchange. At the same time, they fail to explain the short-run determinants of the exchange rate. These nine innovative essays use a microstructure approach to analyze the workings of the foreign exchange market, with special emphasis on institutional aspects and the actual behavior of market participants. They examine the volume of transactions, heterogeneity of traders, the time of day and location of trading, the bid-ask spread, and the high level of exchange rate volatility that has puzzled many observers. They also consider the structure of the market, including such issues as nontransparency, asymmetric information, liquidity trading, the use of automated brokers, the relationship between spot and derivative markets, and the importance of systemic risk in the market. This timely volume will be essential reading for anyone interested in the economics of international finance.

Download or read book Risk and Return for Regulated Industries written by Bente Villadsen and published by Academic Press. This book was released on 2017-04-27 with total page 362 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risk and Return for Regulated Industries provides a much-needed, comprehensive review of how cost of capital risk arises and can be measured, how the special risks regulated industries face affect fair return, and the challenges that regulated industries are likely to face in the future. Rather than following the trend of broad industry introductions or textbook style reviews of utility finance, it covers the topics of most interest to regulators, regulated companies, regulatory lawyers, and rate-of-return analysts in all countries. Accordingly, the book also includes case studies about various countries and discussions of the lessons international regulatory procedures can offer. Presents a unified treatment of the regulatory principles and practices used to assess the required return on capital Addresses current practices before exploring the ways methods play out in practice, including irregularities, shortcomings, and concerns for the future Focuses on developed economies instead of providing a comprehensive global reviews Foreword by Stewart C. Myers

Download or read book Pricing Risks Across Currency Denominations written by Thomas Andreas Maurer and published by . This book was released on 2018 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use principal component analysis on 55 bilateral exchange rates of 11 developed currencies to identify two important global risk sources in FX markets. The risk sources are related to Carry and Dollar but are not spanned by these factors. We estimate the market prices associated with the two risk sources in the cross-section of FX market returns and construct FX market implied country-specific SDFs. The SDF volatilities are related to interest rates and expected carry trade returns in the cross-section. The SDFs price international stock returns and are related to important financial stress indicators and macroeconomic fundamentals. The first principal risk is associated with the TED spread, quantities measuring volatility, tail and contagion risks and future economic growth. It earns a relatively small implied Sharpe ratio. The second principal risk is associated with the default and term spreads and quantities capturing volatility and illiquidity risks. It further correlates with future changes in the long term interest rate and earns a large implied Sharpe ratio.