Option-Implied Currency Risk Premia - Princeton University

Table V
Option-Implied Currency Risk Premia: Individual currency pairs
The table reports the results of a regression analysis of realized carry trade returns for individual currency pairs on option-implied
currency risk premia and interest rate differentials. The returns are measured using 21-day non-overlapping intervals, and the
explanatory variables are assumed to be measured as of the last day preceding that interval. We report two sets of results. The
first is based on repeated cross-sectional regressions (Fama-MacBeth); the second, is based on a pooled panel regression. The
reported coefficients are time series averages and standard errors are computed on the basis of the time series of estimates. Adj. R 2
reports the average cross-sectional adjusted R 2 . Standard errors of coefficient estimates are reported in parentheses (N = 167).
The second set of regressions is based on pooled panel regressions with currency-pair fixed effects (N = 24 · 167 = 4008). For
panel regressions, standard errors are adjusted for cross-sectional correlation and time series auto- and cross-correlations using the
methodology from Thompson (2011) with three lags. The panel regression is run with country-fixed effects; however, the adjusted
R 2 is reported net of the explanatory power of the fixed effects. Finally, we report the p-value for two hypothesis tests. The first
hypothesis asserts that the model is correctly specified, such that the regression intercept (respectively, fixed effects) is zero and
the slope coefficients on the model-implied risk premia are one (H 0 ). When additional regressors are included, the model predicts
a zero coefficient on those variables; if no model-implied variables are included in the regression, we do not report the result of
the test. The second hypothesis (H 1 ) is that the included variables have no explanatory power (i.e. all the coefficients with the
exception of the intercept are zero).
Cross-sectional
Panel
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Intercept 0.00 -0.00 0.00 -0.00 -0.00 FE FE FE FE FE
(0.00) (0.00) (0.00) (0.00) (0.00)
λ ji
t 2.09 0.73 -0.22 -0.21
(1.31) (1.44) (0.72) (0.74)
λ ji,hml
t 2.50 0.75 -0.15 -0.11
(1.42) (1.46) (0.72) (0.75)
λ ji,refF X
t 6.01 6.74 -5.25 -6.61
(4.03) (4.53) (4.81) (4.68)
r j t − ri t 0.14 0.11 0.08 0.06 0.05 0.07
(0.05) (0.06) (0.06) (0.07) (0.08) (0.08)
Adj. R 2 0.30 0.47 0.26 0.43 0.57 0.00 0.00 0.00 0.00 0.00
(0.02) (0.02) (0.02) (0.02) (0.02) - - - - -
N 167 167 167 167 167 4008 4008 4008 4008 4,008
H 0 p-value [%] 68.90 45.22 - 27.76 32.35 0.00 0.00 - 0.00 0.00
H 1 p-value [%] 11.01 11.88 0.51 6.20 17.07 75.47 53.86 44.01 68.28 46.25