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Crash Risk in Currency Markets - A Skewness Measure Approach

49 Pages Posted: 20 Dec 2011  

Sofia Cazzaniga

Swiss Finance Institute and University of Lugano

Date Written: December 9, 2011

Abstract

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

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

Sofia Cazzaniga (Contact Author)

Swiss Finance Institute and University of Lugano ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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