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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Abstract
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) |
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| Official URL: | http://www.systemicrisk.ac.uk/ |
| 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: | 11 Dec 2024 19:16 |
| Projects: | ES/K002309/1 |
| Funders: | Economic and Social Research Council |
| URI: | http://eprints.lse.ac.uk/id/eprint/60955 |
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