Crash risk in currency returns
Irina Zviadadze – Stockholm School of Economics
& Mikhail Chernov – UCLA Anderson & CEPR & Jeremy Graveline – Minnesota Carlson

We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance, jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the US dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements, jumps in variance are not. On average, jumps account for 25% of total currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced…


Irina Zviadadze

Irina Zviadadze is an Assistant Professor of Finance at the Stockholm School of Economics. She graduated in 2013 from the London Business School with a PhD in Finance. Her research focuses on macro-based asset pricing and financial econometrics. Recently, she has studied regular and crash risk in the foreign exchange market and characterized the importance of multiple sources of consumption risk across currencies and investment horizons.
The recent financial crisis has reminded research community that understanding the nature and impact of crash risk on financial markets has to be on top of our agenda. My coauthors and I are studying the importance of extreme events in the foreign exchange that is characterized by highly volatile and sizeable risk premia. To know more…

 

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