Abstract

http://ssrn.com/abstract=720501
 
 

References (80)



 
 

Citations (34)



 
 

Footnotes (9)



 


 



Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies


Peter Carr


New York University (NYU) - Courant Institute of Mathematical Sciences

Liuren Wu


City University of New York, CUNY Baruch College - Zicklin School of Business

Gurdip Bakshi


University of Maryland - Robert H. Smith School of Business

December 20, 2006

Robert H. Smith School Research Paper No. RHS 06-154

Abstract:     
We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using time-series returns and option prices on three currency pairs that form a triangular relation. Estimation shows that the average risk premium in Japan is larger than that in the US or the UK, the global risk premium is more persistent and volatile than the country-specific risk premiums, and investors respond differently to different shocks. We also identify high-frequency jumps in each economy, but find that only downside jumps are priced. Finally, our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals.

Number of Pages in PDF File: 45

Keywords: Stochastic discount factors, international economy, stochastic risk premium

JEL Classification: G12, G13, F31, C52

working papers series


Download This Paper

Date posted: May 9, 2005 ; Last revised: February 13, 2011

Suggested Citation

Carr, Peter and Wu, Liuren and Bakshi, Gurdip, Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies (December 20, 2006). Robert H. Smith School Research Paper No. RHS 06-154. Available at SSRN: http://ssrn.com/abstract=720501 or http://dx.doi.org/10.2139/ssrn.720501

Contact Information

Peter P. Carr
New York University (NYU) - Courant Institute of Mathematical Sciences ( email )
251 Mercer Street
New York, NY 10012
United States
Liuren Wu (Contact Author)
City University of New York, CUNY Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://faculty.baruch.cuny.edu/lwu/
Gurdip S. Bakshi
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-2261 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/gbakshi
Feedback to SSRN


Paper statistics
Abstract Views: 3,245
Downloads: 685
Download Rank: 19,584
References:  80
Citations:  34
Footnotes:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.296 seconds