Intertemporal Risk-Return Trade-Off in Foreign Exchange Rates
CREATES Research Paper No. 2010-20
27 Pages Posted: 12 May 2010
Date Written: May 10, 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 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: Suggested Citation