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International correlation risk

Mueller, Philippe, Stathopoulos, Andreas and Vedolin, Andrea (2014) International correlation risk. Systemic Risk Centre Discussion Papers (26). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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We document that cross-sectional FX correlation disparity is countercyclical, as exchange rate pairs with high average correlation become more correlated in bad times whereas pairs with low average correlation become less correlated. We show that currencies that perform badly (well) during periods of high cross-sectional disparity in conditional FX correlation yield high (low) average excess returns, suggesting that correlation risk is priced in currency markets. Furthermore, we find a negative cross-sectional relationship between average FX correlations and average FX correlation risk premia. Finally, we propose a no-arbitrage model that can match salient properties of FX correlations and correlation risk premia.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2014 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Date Deposited: 16 Feb 2015 14:50
Last Modified: 15 Sep 2023 23:34
Projects: ES/K002309/1
Funders: Economic and Social Research Council

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