Skewness Risk Premia and the Cross-Section of Currency Returns
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Skewness Risk Premia and the Cross-Section of Currency Returns
Junye Li; Lucio Sarno; Gabriele Zinna
- Fudan University
- ?Fudan University - School of Management
- PTCambridge School
- Centre for Economic Policy Research
- University of Cambridge
- ?Centre for Economic Policy Research (CEPR)
- ?University of Cambridge - Judge Business School
- ITBank of Italy
- ?Bank of Italy - Research Department
Strategy in a nutshell
Long-short currency portfolios based on skewness risk premia (SRP): at month-end, go long top 20% (P5) and short bottom 20% (P1) currencies. Equal-weighted, monthly rebalanced.
Economic rationale
Strategy exploits investors’ aversion to skewness risk, capturing asymmetry in currency return distributions. SRP drives pricing beyond variance risk, offering insights into macro-financial risk and currency pricing.
Backtest performance
Annualised return5.64%
Volatility7.03%
Sharpe ratio0.8