Abstract

http://ssrn.com/abstract=2049809
 
 

References (39)



 
 

Citations (8)



 


 



International Correlation Risk


Philippe Mueller


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

Andreas Stathopoulos


University of Washington

Andrea Vedolin


London School of Economics and Political Science

May 27, 2016


Abstract:     
We document that cross-sectional FX correlation dispersion is countercyclical, as FX pairs with high average correlation become more correlated in bad times whereas pairs with low average correlation become less correlated. We also show that currencies that perform badly (well) during periods of high cross-sectional disparity in conditional FX correlation yield high (low) average excess returns. Finally, we find a negative cross-sectional relationship between average FX correlations and average option-implied FX correlation risk premia. To jointly match the empirical properties of FX correlations and correlation risk premia, we propose a no-arbitrage model that features unspanned FX correlation risk.

Number of Pages in PDF File: 72

Keywords: Correlation Risk, International Finance, Exchange Rates

JEL Classification: G15, F31


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Date posted: May 3, 2012 ; Last revised: May 29, 2016

Suggested Citation

Mueller, Philippe and Stathopoulos, Andreas and Vedolin, Andrea, International Correlation Risk (May 27, 2016). 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 Washington ( email )
Seattle, WA 98195
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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