Intertemporal Risk-Return Trade-Off in Foreign Exchange Rates
University of Aarhus - School of Economics and Management - CREATES
May 10, 2010
CREATES Research Paper No. 2010-20
We investigate the intertemporal risk-return trade-off of foreign exchange (FX) rates for ten currencies quoted against the USD. For each currency, we use three risk measures simultaneously that pertain to that currency; its realized volatility, its realized skewness, and its value-at-risk. We apply monthly FX excess returns and monthly FX risk measures calculated from daily observations. We find that there is a positive and significant contemporaneous risk-return trade-off for most currencies. There is no evidence of noncontemporaneous risk-return trade-off. The risk-return trade-off changes during the recent financial crisis in that it becomes nonexistent for several currencies and negative for others.
Number of Pages in PDF File: 27
Keywords: Foreign exchange rates, Risk-return trade-off, Realized volatility, Realized skewness, Value-at-risk, Financial crisis
JEL Classification: F31, G01, G15working papers series
Date posted: May 12, 2010
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