Cookies?
Library Header Image
LSE Research Online LSE Library Services

International correlation risk

Mueller, Philippe and Stathopoulos, Andreas and Vedolin, Andrea (2013) International correlation risk. FMG discussion papers, DP716. Financial Markets Group, The London School of Economics and Political Science, London, UK.

Full text not available from this repository.

Identification Number: DP716

Abstract

We provide novel evidence of priced correlation risk in the foreign exchange market. Currencies that perform badly (well) during periods of high exchange rate correlation have high (low) average returns. We also show that high (low) interest rate currencies have high (low) correlation risk exposure, providing a risk-based justification for the carry trade. To address our empirical findings, we consider a general equilibrium model that incorporates preferences characterized by external habit formation and home bias. In our model, currencies which depreciate when conditional exchange rate correlation is high command high risk premia due to their adverse exposure to global risk aversion shocks.

Item Type: Monograph (Discussion Paper)
Official URL: http://www2.lse.ac.uk/fmg/home.aspx
Additional Information: © 2013 The Authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 16 Apr 2012 10:15
Last Modified: 27 Feb 2014 15:35
Funders: The Suntory and Toyota International Centres for Economics and Related Disciplines
URI: http://eprints.lse.ac.uk/id/eprint/43087

Actions (login required)

View Item View Item