The Cross-Section of Currency Volatility Premia

96 Pages Posted: 13 Jan 2017 Last revised: 20 Oct 2018

See all articles by Pasquale Della Corte

Pasquale Della Corte

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Roman Kozhan

University of Warwick - Warwick Business School

Anthony Neuberger

City University London - Faculty of Finance

Date Written: October 15, 2018

Abstract

We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes – volatility carry strategy – generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk. We provide evidence that exposure to volatility carry risk is related to squared differences in growth between the US and the local economy.

Keywords: Currency Volatility Risk Premia, Forward Volatility Agreement, Foreign Exchange Volatility, Term Structure

JEL Classification: F31, F37, G01, G11, G12, G13, G15

Suggested Citation

Della Corte, Pasquale and Kozhan, Roman and Neuberger, Anthony, The Cross-Section of Currency Volatility Premia (October 15, 2018). Available at SSRN: https://ssrn.com/abstract=2892114 or http://dx.doi.org/10.2139/ssrn.2892114

Pasquale Della Corte

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
+44(0)20 759 49331 (Phone)

HOME PAGE: http://sites.google.com/view/pasqualedellacorte

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Anthony Neuberger

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

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