Conditional Co-Skewness and Safe-Haven Currencies: A Regime Switching Approach
59 Pages Posted: 27 Jun 2018
Date Written: June 12, 2018
We examine hedging benefits of safe-haven currencies in terms of currency co-skewness with the global stock market (covariance between currency return and global equity volatility) derived from a Markov regime switching model. Of the major currencies, the US dollar, the Japanese yen and the Swiss franc have positive currency co-skewness, providing a hedge against global stock volatility. Moreover, lower excess returns and associated lower interest rates on these currencies are partially attributable to their positive co-skewness because currency co-skewnesses are significantly priced with the expected negative risk premia. The co-skewness pricing effect remains robust even after allowance for time-varying or downside beta, volatility and skewness.
Keywords: currency hedging; safe-haven currencies; conditional co-skewness; regime switching; international asset pricing
JEL Classification: G11; G12; G15
Suggested Citation: Suggested Citation