Topic: Variance Risk Premiumsthe Forward Premium Puzzle

Speaker: Juan M. Londono, Board of Governors of the Federal Reserve System

Date: July 8, 2013 (Mon.)

Time: 13:00-14:30am

Location: Building 4, Room 101

Language: English

Abstract:

We provide new empirical evidence that the world currency variance risk premium, constructed as an average of the variance risk premiums of available currencies with respect to the U.S. dollar, significantly predicts the appreciation rates of 22 currencies. The predictability is maximized at the 4-months horizon,the gains in R2s are substantial compared with the interest rate differential. We also show that the stock variance risk premium, measured as the U.S. stock variance risk premiumas an average of those of major countries, has non-redundantsignificant predictive power for the appreciation rates of all 22 currencies, especially at the 1-month horizon. These time-variations in expected currency returns help to provide a risk-based interpretation of the forward premium puzzle.

About the speaker:

Dr. Juan M. Londono is currently an Economist at Board of Governors of the Federal Reserve System. He received his Ph.D. in Finance from Tilburg University in 2011Ph.D. in Quantitative Finance from Basque Country University in 2009. Dr. Londono’s research interests focus on asset pricinginternational finance. He has published in Journal of Empirical Finance, International Review of EconomicsFinanceother leading journals.