Conditional Risk Premia in Currency Markets and Other Asset Classes

Abstract We show that returns to value strategies in individual equities, industries, commodities, currencies, global government bonds, and global stock indexes are predictable in the time series by their respective value spreads. In all these asset classes, expected value returns vary by at least as much as their unconditional level. A single common component of the value spreads captures about two-thirds of value return predictability and the remainder is asset class specific. We argue that common variation in value premia is consistent with rationally time-varying expected returns, because (i) common value is closely associated with standard proxies for risk premia, such as the dividend yield, intermediary leverage, and illiquidity, and (ii) value premia are globally high in bad times.

Download Full-text

Conditional Risk Premia in International Government Bond Markets

Multinational Finance Journal ◽

10.17578/12-3/4-2 ◽

2008 ◽

Vol 12 (3/4) ◽

pp. 185-204

Author(s):

Joëlle Miffre ◽

Keyword(s):

Risk Premia ◽

Bond Markets ◽

Government Bond ◽

Conditional Risk ◽

Government Bond Markets

Download Full-text

Subjective Return Expectations, Perceptions, and Portfolio Choice

Journal of Risk and Financial Management ◽

10.3390/jrfm15010006 ◽

2021 ◽

Vol 15 (1) ◽

pp. 6

Author(s):

Hector Calvo-Pardo ◽

Xisco Oliver ◽

Luc Arrondel

Keyword(s):

Portfolio Choice ◽

Expected Returns ◽

Extensive Margin ◽

Substantial Portion ◽

Market Returns ◽

Stock Market Returns ◽

Trade Off ◽

Risk Return ◽

Conditional Risk ◽

Asset Classes

Exploiting a representative sample of the French population by age, wealth, and asset classes, we document novel facts about their expectations and perceptions of stock market returns. Both expectations and perceptions of returns are very dispersed, significantly lower than their data counterparts, and a substantial portion of the variation in the former is explained by dispersion in the latter. Consistent with portfolio choice models under incomplete information, a conditional risk-return trade-off explains the intensive margin, while at the extensive margin, only expected returns matter. Despite accounting for survey measurement error in subjective return expectations, ’muted sensitivities’ at both portfolio choice margins obtain, getting consistently (i) bigger when excluding informed non-participants, and (ii) smaller, for inertial and professionally delegated portfolios.

Download Full-text

The Effect of “Brexit” Uncertainty on The FTSE 100 Index and The UK Pound

European Journal of Economics ◽

10.33422/eje.v1i1.42 ◽

2021 ◽

Vol 1 (1) ◽

pp. 1-13

Author(s):

Rory McCann ◽

Daniel Broby

Keyword(s):

Economic Impact ◽

Asset Prices ◽

Custom Union ◽

Risk Premia ◽

Country Risk ◽

Opinion Poll ◽

The European Union ◽

Currency Markets ◽

The Uk ◽

The Impact

We investigate the impact of the uncertainty surrounding the United Kingdom’s proposed departure from the European Community (“Brexit”) on financial assets. We conduct an event study around the November 14th 2018 draft withdrawal agreement. Our motivation was that the economic impact of the various political permutations that persisted throughout the negotiation period were both measurable and distinct. The probability of each Brexit scenario that was discussed varied over the political discourse. Using opinion poll data we investigate the event impact on both the FTSE 100 and the UK Pound. We found that, in accordance with existing academic evidence, asset prices discounted the weighted probabilistic economic impact of likely outcomes. We observe, however, that this impact was not as immediate as theory suggests. Interestingly, currency markets had the greater sensitivity. Our conclusions have important implications for the pricing of country risk premia in general and the European Union in particular. Key takeaways: 1) Asset prices were slow to discount the weighted probabilistic economic impact of Brexit risk. 2) Currency markets had the greater sensitivity to changes in Brexit risk. 3) Country risk premia can be impacted by perceived changes in custom union.

Download Full-text

Global Equity Correlation in International Markets

Management Science ◽

10.1287/mnsc.2020.3780 ◽

2021 ◽

Author(s):

Joon Woo Bae ◽

Redouane Elkamhi

Keyword(s):

International Markets ◽

Currency Markets ◽

Cross Sectional ◽

Sovereign Bonds ◽

Price Of Risk ◽

Aggregate Risks ◽

International Equity ◽

Asset Classes ◽

Fx Market ◽

Shed Light

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks. This paper was accepted by Karl Diether, finance.

Download Full-text