18 results found
An increase in a country’s sovereign risk, as measured by credit default swap spreads, is ac-companied by a contemporaneous depreciation of its currency and an increase of its volatility. The relation between currency excess returns and sovereign risk is mainly driven by default expectations (rather than distress risk premia) and exposure to global sovereign risk shocks, and also emerges in a predictive setting for currency risk premia. We show that a sovereign risk factor is priced in the cross-section of currency returns and that it is not subsumed by the carry factor.
Cenedese G, Della Corte P, Wang T, 2021, Currency mispricing and dealer balance sheets, The Journal of Finance, Vol: 76, Pages: 2763-2803, ISSN: 0022-1082
We find dealer-level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.
Della Corte P, Krecetovs A, 2021, Current Account Uncertainty and Currency Premia, Management Science
Della Corte P, Jeanneret A, Patelli E, 2021, A credit-based theory of the currency risk premium, Journal of Financial Economics, ISSN: 0304-405X
This paper uncovers a novel component for exchange rate predictability basedon the price difference between sovereign credit default swaps denominated indifferent currencies. This new forecasting variable – the credit-implied risk premium – captures the expected currency depreciation conditional on a severebut rare credit event. Using data for 16 Eurozone countries, we find that thecredit-implied risk premium positively forecasts the dollar-euro exchange ratereturn at various horizons. Moreover, a currency strategy that exploits the informative content of our predictor generates substantial out-of-sample economicvalue against the na¨ıve random walk benchmark.
Della Corte P, Kozhan R, Neuberger A, 2021, The cross-section of currency volatility premia, Journal of Financial Economics, Vol: 139, Pages: 950-970, ISSN: 0304-405X
We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes - volatility carry strategy - generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk.
Corte PD, Kozhan R, Neuberger A, 2021, The cross-section of currency volatility premia, Journal of Financial Economics, Vol: 139, Pages: 950-970, ISSN: 0304-405X
Della Corte P, Riddiough SJ, Sarno L, 2016, Currency premia and global imbalances, Review of Financial Studies, Vol: 29, Pages: 2161-2193, ISSN: 1465-7368
We show that a global imbalance risk factor that captures the spread in countries’ external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross-sections of other major asset markets.
Della Corte P, Ramadorai T, Sarno L, 2016, Volatility risk premia and exchange rate predictability, Journal of Financial Economics, Vol: 120, Pages: 21-40, ISSN: 0304-405X
We discover a new currency strategy with highly desirable return and diversification properties, which uses the predictive ability of currency volatility risk premia for currency returns. The volatility risk premium—the difference between expected realized volatility and model-free implied volatility—reflects the costs of insuring against currency volatility fluctuations. The strategy sells high insurance-cost currencies and buys low insurance-cost currencies. A distinctive feature of the strategy’s returns is that they are mainly generated by movements in spot exchange rates instead of interest rate differentials. We explore explanations for the profitability of the strategy, which cannot be understood using traditional risk factors.
Della Corte P, Kosowski R, Wang T, 2015, Market Closure and Short-Term Reversal, SSRN Working paper
Della Corte P, Tsiakas I, 2012, Statistical and Economic Methods for Evaluating Exchange Rate Predictability, Handbook of Exchange Rates, Editors: James, Sarno, Marsh, (forthcoming), Publisher: Wiley
Della Corte P, Sarno L, Sestieri G, 2012, The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth?, Review of Economics and Statistics
Della Corte P, Sarno L, Tsiakas I, 2012, Volatility and Correlation Timing in Active Currency Management, Handbook of Exchange Rates, Editors: James, Sarno, Marsh, (forthcoming), Publisher: Wiley
Della Corte P, Sarno L, Tsiakas I, 2011, Spot and Forward Volatility in Foreign Exchange, Journal of Financial Economics, Vol: 100, Pages: 496-513
Della Corte P, Sarno L, Tsiakas I, 2011, Carry on speculating on the volatility of foreign exchange, Publisher: Vox
Della Corte P, Sarno L, Valente G, 2010, A Century of Equity Premium Predictability and the Consumption-Wealth Ratio: An International Perspective, Journal of Empirical Finance, Vol: 17, Pages: 313-331
Della Corte P, Sarno L, Tsiakas I, 2009, An Economic Evaluation of Empirical Exchange Rate Models, Review of Financial Studies, Vol: 22, Pages: 3491-3530
Della Corte P, Sarno L, Tsiakas I, 2008, Can we predict exchange rates? Economic evidence against the random walk model, Publisher: Vox
Della Corte P, Sarno L, Thornton DL, 2008, The Expectation Hypothesis of the Term Structure of Very Short-term Rates: Statistical Tests and Economic Value, Journal of Financial Economics, Vol: 89, Pages: 158-174
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