The yen–dollar risk premium: A story of regime shifts in bond markets

Sungjun Cho; Stuart Hyde; Liu Liu

doi:10.1016/j.intfin.2022.101531

The yen–dollar risk premium: A story of regime shifts in bond markets

Sungjun Cho, Stuart Hyde, Liu Liu

Nottingham University Business School China

Research output: Journal Publication › Article › peer-review

Abstract

We document a new risk premium in the yen–dollar currency pair that compensates for the uncertainty over regime shifts in the bond market. We estimate a no-arbitrage regime-switching term structure model, where the transition of volatility regimes is driven by the level of yields and is associated with a regime risk premium. We find that the currency excess return is explained by the regime risk premium in Japan in the second half of 1990s and in the US at the height of the Great Recession. The regime risk premium contains information beyond the affine model, the forward premium, and the carry and dollar factors.

Original language	English
Article number	101531
Journal	Journal of International Financial Markets, Institutions and Money
Volume	78
DOIs	https://doi.org/10.1016/j.intfin.2022.101531
Publication status	Published - May 2022

Keywords

Exchange rates
Regime switching
Term structure

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.intfin.2022.101531

Cite this

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abstract = "We document a new risk premium in the yen–dollar currency pair that compensates for the uncertainty over regime shifts in the bond market. We estimate a no-arbitrage regime-switching term structure model, where the transition of volatility regimes is driven by the level of yields and is associated with a regime risk premium. We find that the currency excess return is explained by the regime risk premium in Japan in the second half of 1990s and in the US at the height of the Great Recession. The regime risk premium contains information beyond the affine model, the forward premium, and the carry and dollar factors.",

keywords = "Exchange rates, Regime switching, Term structure",

author = "Sungjun Cho and Stuart Hyde and Liu Liu",

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AB - We document a new risk premium in the yen–dollar currency pair that compensates for the uncertainty over regime shifts in the bond market. We estimate a no-arbitrage regime-switching term structure model, where the transition of volatility regimes is driven by the level of yields and is associated with a regime risk premium. We find that the currency excess return is explained by the regime risk premium in Japan in the second half of 1990s and in the US at the height of the Great Recession. The regime risk premium contains information beyond the affine model, the forward premium, and the carry and dollar factors.

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KW - Term structure

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The yen–dollar risk premium: A story of regime shifts in bond markets

Abstract

Keywords

ASJC Scopus subject areas

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