Conditional Co-Skewness and Safe-Haven Currencies: A Regime Switching Approach

59 Pages Posted: 27 Jun 2018

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Jian Yang

University of Colorado at Denver - Business School

Yinggang Zhou

Department of Finance at School of Economics (SOE), and Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Date Written: June 12, 2018

Abstract

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

Chan, Kalok and Yang, Jian and Zhou, Yinggang, Conditional Co-Skewness and Safe-Haven Currencies: A Regime Switching Approach (June 12, 2018). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3194384

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Jian Yang

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

Yinggang Zhou (Contact Author)

Department of Finance at School of Economics (SOE), and Wang Yanan Institute for Studies in Economics (WISE), Xiamen University ( email )

A403 Economic Building, Xiamen University
Xiamen, 361005
China

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