TY - JOUR
T1 - The conditional volatility premium on currency portfolios
AU - Byrne, Joseph P.
AU - Sakemoto, Ryuta
N1 - Funding Information:
We have benefited from five anonymous reviewers and discussion with Jun Nagayasu. We also would like to thank Takahiro Obata for his research support. All errors belong to the authors. This work was supported by KAKENHI ( 20K22092 ).
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2021/9
Y1 - 2021/9
N2 - Our paper examines conditional risk-return relations in a number of currency investment strategies, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk for most currency portfolios. In particular, value and momentum portfolios present risk-return relationships which switch sign, depending upon economic states. The positive relationship for the value portfolio is associated with “flight to quality” periods and the mean reversion for nominal exchange rates during financial crises. The positive relationship for the momentum portfolio is linked to the US and global business cycles and investors require positive compensation for risk in recessions.
AB - Our paper examines conditional risk-return relations in a number of currency investment strategies, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk for most currency portfolios. In particular, value and momentum portfolios present risk-return relationships which switch sign, depending upon economic states. The positive relationship for the value portfolio is associated with “flight to quality” periods and the mean reversion for nominal exchange rates during financial crises. The positive relationship for the momentum portfolio is linked to the US and global business cycles and investors require positive compensation for risk in recessions.
KW - Conditional factor model
KW - Currency carry trade
KW - Currency variability
KW - Momentum
KW - Systematic risk
KW - Value
UR - http://www.scopus.com/inward/record.url?scp=85114507168&partnerID=8YFLogxK
U2 - 10.1016/j.intfin.2021.101415
DO - 10.1016/j.intfin.2021.101415
M3 - Article
AN - SCOPUS:85114507168
SN - 1042-4431
VL - 74
JO - Journal of International Financial Markets, Institutions and Money
JF - Journal of International Financial Markets, Institutions and Money
M1 - 101415
ER -