Abstract

https://ssrn.com/abstract=2049809
 
 

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Citations (8)



 


 



International Correlation Risk


Philippe Mueller


London School of Economics & Political Science (LSE) - Department of Finance

Andreas Stathopoulos


University of Washington

Andrea Vedolin


London School of Economics and Political Science

October 26, 2016


Abstract:     
We document that the cross-sectional dispersion of conditional FX correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high-dispersion states, FX option prices are consistent with investors being compensated for the risk of low-dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.

Number of Pages in PDF File: 70

Keywords: Correlation Risk, Exchange Rates, International Finance

JEL Classification: F31, G15


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Date posted: May 3, 2012 ; Last revised: October 29, 2016

Suggested Citation

Mueller, Philippe and Stathopoulos, Andreas and Vedolin, Andrea, International Correlation Risk (October 26, 2016). Available at SSRN: https://ssrn.com/abstract=2049809 or http://dx.doi.org/10.2139/ssrn.2049809

Contact Information

Philippe Mueller
London School of Economics & Political Science (LSE) - Department of Finance ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Andreas Stathopoulos
University of Washington ( email )
Seattle, WA 98195
United States
Andrea Vedolin (Contact Author)
London School of Economics and Political Science ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
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