Global Risk and Market Conditions
55 Pages Posted: 16 Apr 2015 Last revised: 6 Apr 2022
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Global Risk and Market Conditions
Date Written: April 1, 2015
Abstract
In a large sample of developed and emerging markets, we show in a conditional setting that globally traded assets such as currencies and international bonds can proxy for global state variables. We find that, differently from market risk, intertemporal risk matters particularly at times when global markets are not in normal economic conditions. Relying on time-variation for prices of risk helps us capture the hedging component, especially the negative one, stemming from proxies like the yen and global sovereign bonds. Our results show that global uncertainty measured by realized world volatility is an important channel for intertemporal risk.
Keywords: Exchange rate risk, intertemporal risk, Developed markets, Emerging Markets
JEL Classification: G15, F31
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