Foreign Exchange Implied. Variance and the Forward Premium Puzzle

Pavlidis, Efthymios and Shackleton, Mark B. and Voukelatos, Nikolaos (2012) Foreign Exchange Implied. Variance and the Forward Premium Puzzle. In: Time-Varying Correlation and Volatility Symposium, May 2012, Wolverhampton. (Unpublished) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

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We explore the hypothesis that Jensen’s Inequality is related to the magnitude of the commonly observed difference between forward rates and the subsequent realizations of spot exchange rates. Compared to the standard specification, it is shown that using the option-implied variance of the spot rate as an additional regressor in the unbiased forward specification results in slope coefficients that are closer to their theoretical value of unity. Furthermore, implied variance is found to have a higher explanatory power over future spot returns compared to that of the forward premium. Our empirical findings are consistent with the hypothesis that the time-varying risk-premium documented in previous studies contains a Jensen’s term of the future spot variance.

Item Type: Conference or workshop item (Paper)
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Nikolaos Voukelatos
Date Deposited: 07 Aug 2012 08:42
Last Modified: 11 Jun 2014 10:46
Resource URI: (The current URI for this page, for reference purposes)
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