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Conditional co-skewness and safe-haven currencies: A regime switching approach

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  • Chan, Kalok
  • Yang, Jian
  • Zhou, Yinggang
Abstract
We examine hedging benefits of safe-haven currencies in terms of currency co-skewness with the global stock market (covariance between currency return and global equity volatility) derived from a Markov regime switching model. Of the major currencies, the US dollar, the Japanese yen and the Swiss franc have positive currency co-skewness, providing a hedge against global stock volatility. Moreover, lower excess returns and associated lower interest rates on these currencies are partially attributable to their positive co-skewness because currency co-skewnesses are significantly priced with the expected negative risk premia. The co-skewness pricing effect remains robust even after allowance for time-varying or downside beta, volatility and skewness.

Suggested Citation

  • Chan, Kalok & Yang, Jian & Zhou, Yinggang, 2018. "Conditional co-skewness and safe-haven currencies: A regime switching approach," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 58-80.
    • Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:58-80
    DOI: 10.1016/j.jempfin.2018.06.001
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    More about this item

    Keywords

    Currency hedging; Safe-haven currencies; Conditional co-skewness; Regime switching; International asset pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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