Paper Link Xiaojun Wang and Chi-Young Choi: Discontinuity of Output Convergence Within the United States: Why Has the Course Changed?, Economic Inquiry, January 2015.
Paper Link Miriam Bruhn and Inessa Love: The Real Impact of Improved Access to Finance: Evidence from Mexico, Journal of Finance, June 2014
Paper Link Ronald Lee, Andrew Mason, and members of the NTA network : Is Low Fertility Really a Problem? Science, 10 October 2014.
Date: Friday, April 29, 2016, at 3 p.m.
Room: Saunders 515
Title: Understanding Exchange Rate Dynamics: Information from Term Structure of FX Options
Speaker: Yu-chin Chen
Institution: University of Washington
This paper uses foreign exchange (FX) options with different strike prices and maturities (``the term structure of volatility smiles'') to capture both expectations and risks. With daily options data for six major currency pairs, we show that the cross section and term structure of options-implied standard deviation, skewness and kurtosis consistently explain not only the conditional mean but also the conditional distribution of subsequent currency excess returns for horizons ranging from one week to twelve months. We also find that exchange rate movements, which are notoriously difficult to model empirically (``the exchange rate disconnect puzzle''), are in fact well-explained by the term structures of forward premia and options-implied higher moments. The robust empirical pattern is consistent with a representative expected utility maximizing investor who, in addition to caring about the mean and variance, also cares about the skewness and kurtosis of the return distribution. Our results suggest that the perennial problems faced by the empirical exchange rate literature are likely due to overly restrictive assumptions inherent in prevailing testing methods, which fail to properly account for the forward-looking property of exchange rates and potential skewness or excess kurtosis in the conditional distribution of FX movements.
Mondays from 12-1:30 pm
Tuesdays from 12-1 pm
Wednesdays from 12-1pm