Option-Implied Currency Risk Premia - Princeton University

Table A.II
Model HML F X Factor Risk Premium Decomposition: Equal-weighted portfolios
This table uses the calibrated pricing kernel model to compute and decompose the HML F X factor risk premium from the
perspective of a U.S. dollar investor. We compute the model-implied HML F X factor risk premium by constructing a hypothetical,
dollar-neutral factor mimicking portfolio on the basis of the calibrated time series of the global factor loadings, ξ i t. At each point
in time, we sort the G10 currencies – excluding the U.S. dollar – into long and short portfolios on the basis of their prevailing
loadings, and equal-weight the currencies within each portfolio. The model risk premia are computed daily and span from January
1999 to June 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, the mean portfolio risk premium (λ HML ; % per annum). We then decompose the portfolio risk premium into
contributions from the Gaussian and non-Gaussian components of the global factor innovation, L g Z t
. Finally, we evaluate the
mechanism through which jumps contribute to equilibrium currency risk premia by decomposing risk premia across the moments
of the pricing kernel innovations (variance, skewness, etc.). For each quantity, we report its time-series mean, volatility, and range.
Results are reported for each of the four specifications reported in Table A.I.
Loadings Risk premium By Shock Type By Moment
Specification ξ H ξ L λ HML Gaussian Non-Gaussian Variance Skewness Other
I Mean 0.87 1.04 2.66 42.28 57.72 85.78 9.32 4.90
Volatility 0.04 0.03 3.16 18.18 18.18 10.54 5.13 5.88
Min. 0.62 0.96 0.11 0.01 0.18 39.08 0.01 0.00
Max. 0.92 1.34 37.48 99.82 99.99 99.99 26.00 36.10
II Mean 0.88 1.04 2.82 40.41 59.59 85.68 9.94 4.38
Volatility 0.00 0.00 3.53 17.17 17.17 9.33 4.73 5.01
Min. 0.88 1.04 0.13 0.01 5.08 37.90 0.08 0.00
Max. 0.88 1.04 42.18 94.92 99.99 99.92 25.89 37.24
III Mean 0.88 1.09 1.95 42.12 57.88 87.64 8.79 3.57
Volatility 0.05 0.05 2.20 20.38 20.38 10.28 5.50 5.31
Min. 0.66 1.00 0.04 0.00 0.16 25.49 0.02 0.00
Max. 0.95 1.45 25.60 99.84 100.00 99.97 26.59 54.47
IV Mean 0.93 1.07 2.12 41.26 58.74 85.70 10.24 4.06
Volatility 0.00 0.00 2.32 18.83 18.83 9.50 5.16 4.76
Min. 0.93 1.07 0.07 0.00 5.84 30.50 0.67 0.06
Max. 0.93 1.07 29.20 94.16 100.00 99.25 26.67 45.74