Quadratic, Cubic and Quartic Moment Risk Premiums in Currency Markets
60 Pages Posted: 20 Jun 2015 Last revised: 28 Jul 2016
Date Written: January 1, 2016
A moment risk premium is the difference between a realized and the corresponding implied moment. I establish the existence of non-zero moment risk premiums in currency markets. Quadratic and quartic risk premiums are mostly negative whereas cubic premiums do not exhibit a predominant sign. The economic and statistical significance of moment risk premiums increases, first, in contract maturity and, second, in moment order. Moment risk premiums cannot be explained by traditional risk factors in currency markets. State-of-the-art option pricing models provide a model-based foundation of the maturity pattern of the risk premiums.
Keywords: currency options, model-free implied moments, power contracts, moment risk premiums
JEL Classification: G12, G13, G15
Suggested Citation: Suggested Citation