Survey Expectations Meet Option Prices: New Insights from the FX Market *
Type
conference contribution
Date Issued
2024-09-27
Author(s)
Abstract
We reconcile two sources of forward-looking expectations for currency returns: consensus forecasts from major financial intermediaries and over-the-counter currency option prices. To connect these expectations, we adopt a broad framework based on no-arbitrage conditions and motivated by various benchmark asset pricing models. Using more than twenty years of data on a large cross-section of currency pairs with maturities of up to two years, we find that the average value of general risk preferences is between 3 and 4. The general risk preferences, moreover, display an upward-sloping term structure in ‘good times’ and a downward-sloping term structure during ‘bad times’.
Keywords
Exchange rate
risk premium
preferences
term structure
business cycle F31
F37
F47
G12
G15
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open.access
Name
DGJ_paper.pdf
Size
832.57 KB
Format
Adobe PDF
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