Global Currency Variance Risk and Currency Return Predictability

53 Pages Posted: 26 Mar 2024

See all articles by Zhiyong Li

Zhiyong Li

Beijing Foreign Studies University

Fang Qiao

University of International Business and Economics (UIBE) - School of Banking and Finance

Tianyi Wang

University of International Business and Economics (UIBE) - School of Banking and Finance

Date Written: February 29, 2024

Abstract

We construct global currency variance risk indices as the equal-weighted average of currency option-implied or realized variance across 17 major currencies, and find that they significantly and positively predict currency returns, especially for horizons beyond one month. The in-sample adjusted R2 statistics are 0.92%–5.08% for global currency option-implied variance and 0.95%–7.48% for global currency realized variance. They perform well for out-of-sample cases, with R2 statistics of 0%–6.43% for global currency option-implied variance and −0.25%–9.94% for global currency realized variance. Additionally, global currency variance risk is closely related to U.S. economic activity, uncertainty, the VIX, and sentiment.

Keywords: global currency variance risk, currency returns, predictive regressions, out-of-sample tests, economic activity

JEL Classification: G12, G15, F31

Suggested Citation

Li, Zhiyong and Qiao, Fang and Wang, Tianyi, Global Currency Variance Risk and Currency Return Predictability (February 29, 2024). Available at SSRN: https://ssrn.com/abstract=4742290 or http://dx.doi.org/10.2139/ssrn.4742290

Zhiyong Li

Beijing Foreign Studies University ( email )

No.19 North Xisanhuan Avenue, Haidian District
Beijing, 100089
China

Fang Qiao (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Tianyi Wang

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

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