The Yen Risk Premium: A Story of Regime Shifts in Bond Markets

Posted: 1 Nov 2018

See all articles by Sungjun Cho

Sungjun Cho

Manchester Business School

Stuart Hyde

University of Manchester - Manchester Business School

Liu Liu

Goethe University Frankfurt - Research Center SAFE

Date Written: September 23, 2018

Abstract

We document a new risk premium in the Japanese yen that compensates for the policy uncertainty in Japan. The yen risk premium is implied from bond markets under the assumption of no-arbitrage. We estimate a regime switching term structure model and find that in Japan, the conventional monetary policy and the zero interest rate policy are characterized by a high volatility and a low volatility regime, respectively. Uncertainty arises during the transition between regimes in the late 1990s. The associated risk premium explains the yen excess return in this period, which is not captured by affine term structure models.

Keywords: Exchange Rates, Term Structure, Regime Switching

JEL Classification: F31, E43, G12

Suggested Citation

Cho, Sungjun and Hyde, Stuart and Liu, Liu, The Yen Risk Premium: A Story of Regime Shifts in Bond Markets (September 23, 2018). Available at SSRN: https://ssrn.com/abstract=3264101

Sungjun Cho

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom
44-161-306-3483 (Phone)

Stuart Hyde

University of Manchester - Manchester Business School ( email )

Booth Street West
Mezzanine Floor, Crawford House
Manchester M15 6PB
United Kingdom
44 (0) 161 275 4017 (Phone)
44 (0) 161 275 4023 (Fax)

Liu Liu (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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