March 24, 2014, 11:00–12:30
Room MF 323
Paul Woolley Research Initiative Seminar
Abstract
We use cross-sectional information on the prices of G10 currency options to calibrate a non-Gaussian model of pricing kernel dynamics and construct estimates of conditional currency risk premia. We find that the mean historical returns to short dollar and carry factors (HMLFX) are statistically indistinguishable from their option-implied counterparts, which are free from peso problems. Skewness and higher-order moments of the pricing kernel innovations on average account for only 15% of the HMLFX risk premium in G10 currencies. These results are consistent with the observation that crash-hedged currency carry trades continue to deliver positive excess returns.