Intertemporal Risk-Return Trade-Off in Foreign Exchange Rates
26 Pages Posted: 10 May 2010 Last revised: 21 Jan 2011
Date Written: May 6, 2010
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 risk measures calculated from daily observations. We find that there is a significant contemporaneous risk-return trade-off for the currencies under investigation. There is no evidence of noncontemporaneous risk-return trade-off. We pay special attention to the risk-return trade-off during the recent financial crisis.
Keywords: Foreign exchange rates, Risk-return trade-off, Realized volatility, Realized skewness, Value-at-risk, Financial crisis
JEL Classification: F31, G01, G15
Suggested Citation: Suggested Citation