Abstract

https://ssrn.com/abstract=2686288
 


 



Dissecting Volatility Risks in Currency Markets


Ingmar Nolte


Lancaster University - Department of Accounting and Finance

Mark P. Taylor


Warwick Business School

Qi Xu


University of Warwick - Warwick Business School

November 4, 2015


Abstract:     
We investigate the pricing of volatility risks in currency markets. First, we show that pricing ability of volatility risk is concentrated in some of its components. Diffusive volatility dominates jump volatility in pricing carry trade returns, while jump volatility is important in jointly explaining carry trade and momentum returns. Both short-run and long-run volatility components are priced, and the short-run component is more important in general. Second, we suggest that factors similar to volatility in identifying bad states, i.e. volatility of volatility and cross sectional volatility are also priced and are not fully subsumed by conventional volatility measures.

Number of Pages in PDF File: 78

Keywords: Foreign Exchange, Carry Trade, Momentum, Volatility, Jump-Diffusion,Short-Run Long-Run Volatility

JEL Classification: C58, F31, G12, G15


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Date posted: November 5, 2015  

Suggested Citation

Nolte, Ingmar and Taylor, Mark P. and Xu, Qi, Dissecting Volatility Risks in Currency Markets (November 4, 2015). Available at SSRN: https://ssrn.com/abstract=2686288 or http://dx.doi.org/10.2139/ssrn.2686288

Contact Information

Ingmar Nolte
Lancaster University - Department of Accounting and Finance ( email )
Lancaster, Lancashire LA1 4YX
United Kingdom
Mark P. Taylor
Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
HOME PAGE: http://www.wbs.ac.uk/faculty/members/mark/taylor
Qi Xu (Contact Author)
University of Warwick - Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
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