Crash Risk and Risk Premia in Currency Markets

apr. 07, 2014

Irina Zviadadze is working on two papers studying the risk-return relationship in currency markets. In “Crash Risk in Currency Returns,” joint with Mikhail Chernov (UCLA) and Jeremy Graveline (University of Minnesota), she quantifies currency market crashes.

The authors document when crash events in currency markets occur and describe their determinants. In the “Term-Structure of Consumption Risk Premia in the Cross-Section of Currency Returns”, Irina Zviadadze studies the importance of macroeconomic risk in the foreign exchange market. She finds that a long-run consumption risk plays a prominent role for currency risk premia. Long-run consumption risk is associated with the annual Sharpe ratio of 0.56 and contributes to the differences in risk premia between low and high interest rate currencies across multiple investment horizons from 1 to 5 quarters. Short-run consumption risk is reflected in currency returns only at the horizon of 1 quarter. The currency carry risk premia compensating risky exposure to consumption risk disappears at horizons longer than 4 quarters.