Option-Implied Currency Risk Premia - Princeton University
Option-Implied Currency Risk Premia - Princeton University
Option-Implied Currency Risk Premia - Princeton University
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Table II<br />
Model HML F X Factor <strong>Risk</strong> Premium Decomposition<br />
This table uses the calibrated pricing kernel model to compute and decompose the HML F X factor risk premium from the<br />
perspective of a U.S. dollar investor. We compute the model-implied HML F X factor risk premium by constructing a hypothetical,<br />
dollar-neutral factor mimicking portfolio on the basis of the calibrated time series of the global factor loadings, ξ i t. At each point<br />
in time, we sort the G10 currencies – excluding the U.S. dollar – into long and short portfolios on the basis of their prevailing<br />
loadings, and weight the currencies within each portfolio on the basis of the absolute deviation of their loading from the average<br />
loadings of currencies with ranks five and six. The model risk premia are computed daily and span from January 1999 to June<br />
2012 (T = 3520 days). We report the global factor loadings of the high and low interest rate portfolios (ξ H and ξ L ), as well as,<br />
the mean portfolio risk premium (λ HML ; % per annum). We then decompose the portfolio risk premium into contributions from<br />
the Gaussian and non-Gaussian components of the global factor innovation, L g Z t<br />
. Finally, we evaluate the mechanism through<br />
which jumps contribute to equilibrium currency risk premia by decomposing risk premia across the moments of the pricing kernel<br />
innovations (variance, skewness, etc.). For each quantity, we report its time-series mean, volatility, and range. Results are reported<br />
for each of the four specifications reported in Table I.<br />
Loadings <strong>Risk</strong> premium By Shock Type By Moment<br />
Specification ξ H ξ L λ HML Gaussian Non-Gaussian Variance Skewness Other<br />
I Mean 0.81 1.12 5.03 42.07 57.93 85.30 9.57 5.13<br />
Volatility 0.05 0.05 6.28 18.18 18.18 10.79 5.17 6.12<br />
Min. 0.46 0.99 0.22 0.01 0.18 38.03 0.01 0.00<br />
Max. 0.88 1.49 74.87 99.82 99.99 99.99 26.14 37.24<br />
II Mean 0.83 1.13 5.31 40.12 59.88 85.05 10.26 4.69<br />
Volatility 0.00 0.00 6.65 17.11 17.11 9.70 4.80 5.35<br />
Min. 0.83 1.13 0.25 0.01 5.09 36.04 0.08 0.00<br />
Max. 0.83 1.13 79.70 94.91 99.99 99.92 26.08 39.37<br />
III Mean 0.80 1.25 4.46 41.82 58.18 86.87 9.17 3.96<br />
Volatility 0.07 0.06 4.99 20.36 20.36 11.01 5.68 5.96<br />
Min. 0.48 1.13 0.10 0.00 0.16 21.62 0.02 0.00<br />
Max. 0.92 1.68 57.92 99.84 100.00 99.97 26.88 59.98<br />
IV Mean 0.87 1.23 5.44 40.95 59.05 84.98 10.65 4.38<br />
Volatility 0.00 0.00 5.96 18.76 18.76 9.90 5.27 5.11<br />
Min. 0.87 1.23 0.17 0.00 5.97 28.47 0.71 0.06<br />
Max. 0.87 1.23 75.25 94.03 100.00 99.21 26.98 48.20