Intertemporal Risk-Return Trade-Off in Foreign Exchange Rates

CREATES Research Paper No. 2010-20

27 Pages Posted: 12 May 2010

Multiple version iconThere are 2 versions of this paper

Date Written: May 10, 2010

Abstract

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 monthly FX risk measures calculated from daily observations. We find that there is a positive and significant contemporaneous risk-return trade-off for most currencies. There is no evidence of noncontemporaneous risk-return trade-off. The risk-return trade-off changes during the recent financial crisis in that it becomes nonexistent for several currencies and negative for others.

Keywords: Foreign exchange rates, Risk-return trade-off, Realized volatility, Realized skewness, Value-at-risk, Financial crisis

JEL Classification: F31, G01, G15

Suggested Citation

Christiansen, Charlotte, Intertemporal Risk-Return Trade-Off in Foreign Exchange Rates (May 10, 2010). CREATES Research Paper No. 2010-20, Available at SSRN: https://ssrn.com/abstract=1603807 or http://dx.doi.org/10.2139/ssrn.1603807

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

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