Download or read book The Skewness Risk Premium in Currency Markets written by Michael Broll and published by . This book was released on 2016 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the relationship between currency option's implied skewness and its future realized skewness, where the difference is known as the skewness risk premium (SRP). The SRP indicates whether investors pay a premium to be insured against future crash risk. Past investigations about implied and realized skewness within currency markets showed that both measures are loosely connected or even exhibit a negative relationship that cannot be rationalized by no-arbitrage arguments. Therefore, this paper studies time-series of future and option contract positions data in order to explain the disconnection in terms of investor's position-induced demand pressure. While demand pressures on options do not sufficiently contribute to the disconnection, there is evidence that, surprisingly, demand pressure in currency future markets have the power to explain this market anomaly. Furthermore, currency momentum also plays an important role, which leads to a strong cyclical demand for OTM calls in rising or OTM puts in declining markets. In order to exploit the disconnection of skewness, a simple skew swap trading strategy proposed by Schneider (2012) has been set up. The resulting skew swap returns are relatively high, but the return distribution is extremely fat-tailed. To appropriately compare different skew swap strategy returns, this paper proposes a Higher Moment Sharpe Ratio that also takes higher moments into account.
Download or read book Semivariance and Semiskew Risk Premiums in Currency Markets written by José Da Fonseca and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using the model-free methodology proposed in the literature, variance and skew swaps are extracted from currency options for several foreign exchange rates. Moreover, these variables are decomposed into semivariance and semiskew swaps, which are conditional to the evolution of the foreign exchange rate, and it is shown to have higher explanatory power for currency excess return. These semivariances enable the definition of a variance-skew swap that also possesses a strong explanatory power for currency excess return. From these variables, higher moment semi-risk premiums can be computed and measure how tail risks are priced. These semivariance and semiskew swaps better explain the currency excess return than the standard or undecomposed ones. For semivariance swaps, both the up and down contracts are equally informative while for semiskew swaps only the down tail related one is. Down semivariance and semiskew swaps carry complementary information regarding the currency excess return. Trimming these variables enables us to show that extreme movements affecting the currency option market contain no information on the evolution of the currency. Lastly, forecasting tests further illustrate the importance of decomposing the variance and skew swaps into semi components as it improves significantly the results.
Download or read book The Skew Risk Premium in the Equity Index Market written by Roman Kozhan and published by . This book was released on 2019 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between the skew in implied volatility and realized skew. Like the variance swap, the skew swap corresponds to a trading strategy, necessary to assess risk premia in a model-free way. We find that almost half of the implied volatility skew can be explained by the skew risk premium. We provide evidence that skew and variance premia are manifestations of the same underlying risk factor in the sense that strategies designed to exploit one of the risk premia but to hedge out the other make zero excess returns.
Download or read book The Cross Sectional Variation of Skewness Risk Premia written by Kai Wang and published by . This book was released on 2018 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper estimates skewness risk premia on individual stocks using synthetic skew swaps and shows that there is a considerably large variation of monthly realized skewness risk premia across a representative set of portfolios which are sorted by skewness risk premium payoffs in the prior period. It then focuses on investigating the determinants of such cross-sectional variation and documents that consumption risk does not seem to be priced with respect to skewness risk premia. The market excess return and, especially, the market variance risk premium are shown to be key risk factors that drive the cross-sectional variation of skewness risk premium payoffs. The market variance risk premium factor is significantly priced with respect to skewness risk premia even if I allow for potential model misspecification. The success of the market variance risk premium factor can be potentially explained by the very different risk exposures of skewness risk premium-based portfolios to the risk proxied by the market variance risk premium. I further show that the higher the exposure of the skewness risk premium-based portfolio to such a risk, the larger skewness risk premium payoff is required in the cross section.
Download or read book Skewness Risk Premium written by Thorsten Lehnert and published by . This book was released on 2013 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Empirical Asset Pricing written by Turan G. Bali and published by John Wiley & Sons. This book was released on 2016-02-26 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: “Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.
Download or read book Stochastic Risk Premiums Stochastic Skewness in Currency Options and Stochastic Discount Factors in International Economies written by Peter Carr and published by . This book was released on 2011 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using time-series returns and option prices on three currency pairs that form a triangular relation. Estimation shows that the average risk premium in Japan is larger than that in the US or the UK, the global risk premium is more persistent and volatile than the country-specific risk premiums, and investors respond differently to different shocks. We also identify high-frequency jumps in each economy, but find that only downside jumps are priced. Finally, our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals.
Download or read book Risk Premia written by Yves Lemperiere and published by . This book was released on 2014 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present extensive evidence that "Risk Premium" is strongly correlated with tail-risk skewness, but very little with volatility. We introduce a new, intuitive definition of skewness, and elicit a linear relationship between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry, short vol, bonds, credit) and their negative skewness. We find a clear exception to this rule: Trend Following (and perhaps the Fama-French "High minus Low"), that has positive skewness and positive excess return, suggesting that some strategies are not risk premia, but genuine market anomalies. Based on our results, we propose an objective criterion to assess the quality of a risk premium portfolio.
Download or read book Variance and Skew Risk Premiums for the Volatility Market written by José Da Fonseca and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extract variance and skew risk premiums from volatility derivatives in a model-free way and analyze their relationships along with volatility index and equity index returns. These risk premiums can be synthesized through option trading strategies. Using a time series of option prices on the VIX, the most liquid volatility derivative market, we find that variance swap excess return can be partially explained by volatility index and equity index excess returns while these latter variables carry little information for the skew swap excess return. The results sharply contrast with those obtained for the equity index option market underlining very specific characteristics of the volatility derivative market.
Download or read book Downside Variance Risk Premium written by Bruno Feunou and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Risk Premium and the Liquidity Premium in Foreign Exchange Markets written by Charles M. Engel and published by . This book was released on 1990 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Risk Premium and the Liquidity Premium in Foreign Exchange Markets written by Charles Engel and published by . This book was released on 1990 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Conditional Risk Premia in Currency Markets and Other Asset Classes written by Martin Lettau and published by . This book was released on 2013 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.
Download or read book The Risk Premium of Volatility Implicit in Currency Options written by Dajiang Guo and published by . This book was released on 1997 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides an empirical investigation of the variance process and the market price of variance risk implied in the foreign currency options market. There are three principal contributions. First, the parameters of Heston's (1993) mean-reverting square root stochastic volatility model are estimated using dollar/mark option prices from 1987 to 1992. Second, it is shown that these quot;impliedquot; parameters can be combined with historical moments of the dollar/mark exchange rate to deduce an estimate of the market price of variance risk. These estimates are found to be nonzero, time varying, and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market. Finally, the out-of-sample test suggests that the historical variance and the Hull and White (1987) implied variance contain no additional information beyond that imbedded in the Heston implied variance.
Download or read book Currency Risk Premia in Global Stock Markets written by Shaun K. Roache and published by . This book was released on 2006 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Risk Premium Spillovers Among Stock Markets written by Marinela Adriana Finta and published by . This book was released on 2018 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the volatility, skewness and kurtosis risk premium spillovers among U.S., U.K., German and Japanese stock markets. We define risk premia as the difference between risk-neutral and realized moments. Our findings highlight that during periods of stress and after 2014, cross-market and cross-moment spillovers increase, and this is mirrored by a decrease in within spillovers. We document strong bi-directional spillovers between skewness and kurtosis risk premia and emphasize the prominent role played by the volatility risk premium. Finally, we show that several macroeconomic and financial factors increase with the intensity of risk premium spillovers.
Download or read book The Impact of Money Markets on the Foreign Exchange Risk Premium written by Deborah Cernauskas and published by . This book was released on 2003 with total page 216 pages. Available in PDF, EPUB and Kindle. Book excerpt:
