Crash Risk in Currency Markets - A Skewness Measure Approach
Swiss Finance Institute and University of Lugano
December 9, 2011
Swiss Finance Institute Research Paper No. 11-61
I study crash risk in currency markets by means of a proxy for global skewness, which measures the aggregate asymmetry of daily changes in spot exchange rates involved in a carry-trade portfolio. I find that this factor is priced in the cross-section of individual currencies. The premium for skewness is about 50 basis points on a monthly basis for a sample period starting in January 1995 and ending in March 2011. The weak correlation of skewness with volatility and other well-known factors demonstrates that crash risk is a fundamental and independent ingredient for the understanding of abnormal foreign investments returns. Results are robust to bid ask spreads, subsample analysis and different measures of asymmetry.
Number of Pages in PDF File: 49
Keywords: Foreign Exchange, Carry Trade, Crash Risk, Skewness
JEL Classification: F31
Date posted: December 20, 2011
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