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

Autor:	Jie-Cao He, Hsing-Hua Chang, Ting-Fu Chen, Shih-Kuei Lin
Jazyk:	angličtina
Rok vydání:	2023
Předmět:	Jump-diffusion process Currency option Risk premia Correlated jumps Public finance K4430-4675 Finance HG1-9999
Zdroj:	Financial Innovation, Vol 9, Iss 1, Pp 1-58 (2023)
Druh dokumentu:	article
ISSN:	2199-4730
DOI:	10.1186/s40854-023-00493-3
Popis:	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.
Databáze:	Directory of Open Access Journals
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