Probability Weighting of Rare Events and Currency Returns
Currencies that deliver low returns when the market highly overweights downside (upside) tail events are unfavorable assets,and thus require high expected returns.A simple structural model formalizes this logic and motivates a methodology for estimating probability weighting function from currency options.Our estimates from 1996 to 2012 show that a global probability weighting measure of left (right) tail events is highly significant in positively (negatively) predicting future currency returns at both individual and portfolios levels.Asset pricing tests confirm that differences in exposure to our global tail weighting measures drive (part of) the cross-sectional variation of currency carry and momentum portfolio returns.
Carry trade momentum non parametric estimation pricing kernel probability weighting function rare event
Fousseni Chabi-Yo Zhaogang Song
Fisher College of Business,The Ohio State University,Columbus,OH 43210,USA Board of Governors of the Federal Reserve System,Washington,D.C,USA
国际会议
2013 China Finance Review International Conference(第六届(2013)中国金融评论国际研讨会)
上海
英文
255-335
2013-07-08（万方平台首次上网日期，不代表论文的发表时间）