Abstract

http://ssrn.com/abstract=2049809
 
 

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International Correlation Risk


Philippe Mueller


London School of Economics & Political Science (LSE) - Department of Finance

Andreas Stathopoulos


University of Southern California - Marshall School of Business

Andrea Vedolin


London School of Economics and Political Science

November 10, 2014


Abstract:     
We document that cross-sectional FX correlation disparity is countercyclical, as exchange rate pairs with high average correlation become more correlated in bad times whereas pairs with low average correlation become less correlated. We show that currencies that perform badly (well) during periods of high cross-sectional disparity in conditional FX correlation yield high (low) average excess returns, suggesting that correlation risk is priced in currency markets. Furthermore, we find a negative cross-sectional relationship be- tween average FX correlations and average FX correlation risk premia. Finally, we propose a no-arbitrage model that can match salient properties of FX correlations and correlation risk premia.

Number of Pages in PDF File: 68

Keywords: Correlation Risk, International Finance, Exchange Rates

JEL Classification: F31, G12, G13

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Date posted: May 3, 2012 ; Last revised: November 11, 2014

Suggested Citation

Mueller, Philippe and Stathopoulos, Andreas and Vedolin, Andrea, International Correlation Risk (November 10, 2014). Available at SSRN: http://ssrn.com/abstract=2049809 or http://dx.doi.org/10.2139/ssrn.2049809

Contact Information

Philippe Mueller
London School of Economics & Political Science (LSE) - Department of Finance ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Andreas Stathopoulos
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
Andrea Vedolin (Contact Author)
London School of Economics and Political Science ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
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