Option-Implied Currency Risk Premia

79 Pages Posted: 13 Oct 2013 Last revised: 17 Oct 2014

See all articles by Jakub W. Jurek

Jakub W. Jurek

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Zhikai Xu

AQR Capital Management, LLC

Date Written: October 15, 2014


We obtain ex ante estimates of risk premia for G10 currency pairs using cross-sectional data on exchange rate options. Option prices are well-matched by a non-Gaussian, two-factor model, consistent with evidence from realized currency returns. We find that option-implied currency risk premia provide an unbiased forecast of monthly currency excess returns, and achieve cross-sectional forecasting R^2s of up to 44%. Despite prominent non-normalities in option data, less than 20% of the model HML-FX risk premium, or roughly 70bps per annum, is due to the asymmetries and higher-moments of global risks.

Keywords: risk premia, currency carry trade, disaster risk, exchange rate options

JEL Classification: F31, G12

Suggested Citation

Jurek, Jakub W. and Xu, Zhikai, Option-Implied Currency Risk Premia (October 15, 2014). Available at SSRN: https://ssrn.com/abstract=2338585 or http://dx.doi.org/10.2139/ssrn.2338585

Jakub W. Jurek (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1588 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zhikai Xu

AQR Capital Management, LLC

Greenwich, CT
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics