Upside and downside correlated jump risk premia of currency options and expected returns

Jie Cao He, Hsing Hua Chang, Ting Fu Chen, Shih Kuei Lin

Research output: Contribution to journalArticlepeer-review

Abstract

This research explores upside and downside jumps in the dynamic processes of three rates: domestic interest rates, foreign interest rates, and exchange rates. To fill the gap between the asymmetric jump in the currency market and the current models, a correlated asymmetric jump model is proposed to capture the co-movement of the correlated jump risks for the three rates and identify the correlated jump risk premia. The likelihood ratio test results show that the new model performs best in 1-, 3-, 6-, and 12-month maturities. The in- and out-of-sample test results indicate that the new model can capture more risk factors with relatively small pricing errors. Finally, the risk factors captured by the new model can explain the exchange rate fluctuations for various economic events.

Original languageEnglish
Article number90
JournalFinancial Innovation
Volume9
Issue number1
DOIs
StatePublished - Dec 2023

Keywords

  • Correlated jumps
  • Currency option
  • Jump-diffusion process
  • Risk premia

Fingerprint

Dive into the research topics of 'Upside and downside correlated jump risk premia of currency options and expected returns'. Together they form a unique fingerprint.

Cite this