49 Pages Posted: 20 Dec 2011
Date Written: December 9, 2011
I study crash risk in currency markets by means of a proxy for global skewness, which measures the aggregate asymmetry of daily changes in spot exchange rates involved in a carry-trade portfolio. I find that this factor is priced in the cross-section of individual currencies. The premium for skewness is about 50 basis points on a monthly basis for a sample period starting in January 1995 and ending in March 2011. The weak correlation of skewness with volatility and other well-known factors demonstrates that crash risk is a fundamental and independent ingredient for the understanding of abnormal foreign investments returns. Results are robust to bid ask spreads, subsample analysis and different measures of asymmetry.
Keywords: Foreign Exchange, Carry Trade, Crash Risk, Skewness
JEL Classification: F31
Suggested Citation: Suggested Citation
Cazzaniga, Sofia, Crash Risk in Currency Markets - A Skewness Measure Approach (December 9, 2011). Swiss Finance Institute Research Paper No. 11-61. Available at SSRN: https://ssrn.com/abstract=1975017 or http://dx.doi.org/10.2139/ssrn.1975017