Skewness Risk Premia and the Cross Section of Currency Returns
Year: 2025
Type: article
Abstract: Using model-free skewness measures that exploit the asymmetry in semivariances and option data from the over-the-counter currency market, we find that buying currencies with a high skewness risk premium (SRP) and selling currencies with a low SRP generates high returns and a Sharpe ratio. Asset pricing tests—which control for omitted variables and measurement errors—show that a SRP factor enters the currency pricing kernel and is central to the pricing of risks inherent in a broad currency cross section of 60 portfolio excess returns. These results imply that skewness risk is a strong and priced source of currency risk.
Authors: Junye Li, Lucio Sarno, Gabriele Zinna
Institutions: Fudan University, University of Cambridge, Bank of Italy
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,550
OpenAlex ID: W4413903103