In this seminar Yu-Chin Chen will provide an overview of her recent paper FX Options and Excess Returns. In this paper Yu-Chin Chen proposes to use prices of traded foreign exchange (FX) options to capture common market assessment for the probability distributions of future exchange rate realisations. Using daily options data for six major currency pairs, she shows that the options-implied FX risk measures - standard deviation, skewness, and kurtosis - consistently explain subsequent currency excess returns for horizons between one week to twelve months. This robust empirical pattern is consistent with a representative expected utility-maximizing investor who, in addition to the mean and variance of asset returns, also cares about the skewness and kurtosis of the return distribution. Pushing beyond matched-frequency UIP-style analyses that consider only the conditional mean, she uses quantile regression analysis to demonstrate that the options-based measures of higher moment risks can predict the full distribution of subsequent excess returns. The term structure and cross-correlation of the options-implied moments add further predictive power, supporting previous literature emphasizing term-structure dynamics and global risk.

Yu-Chin Chen is Associate Professor of the University of Washington. Yu-Chin Chen is currently working on projects that look at exchange rate determinations and forecasts, commodity currencies, the yield curves, monetary policy under adaptive learning, and the effects of soveign debt relief and foreign aid on growth and income inequality.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.