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Title:The intertemporal relation between expected return and risk on currency PDF Logo
Authors:Bali, Turan G.
Yilmaz, Kamil
Issue Date:2009
Series/Report no.:TÜSİAD-Koç University Economic Research Forum working paper series 0909 [rev.]
Abstract:The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.
Subjects:foreign exchange market
ICAPM
high-frequency data
time-varying risk aversion
daily realized volatility
JEL:G12
C13
C22
Document Type:Working Paper
Appears in Collections:ERF Working Paper Series, TÜSİAD-Koç University Economic Research Forum (ERF)

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