skip to primary navigationskip to content

Currency regimes, market microstructure and the currency risk premium

Project Title: Currency regimes, market microstructure and the currency risk premium

PI: David Chambers (CEAM, CJBS)

Project Period: April 2016 - July 2017

First, we study the currency risk premium over the long-run and the impact of regime changes on the returns to currency speculation. The asset pricing literature has centered on understanding expected return or risk premium. However, the existing literature is lacking a long-run perspective on currency risk and return and on the impact of monetary regime changes. Existing research on currencies typically focuses on the post-Bretton Woods floating period from 1983. Examining the impact of monetary regime shifts on currency returns therefore offers academics and practitioners a new perspective on the risk-return tradeoff in currency speculation.

Second, we study the determinants of bid-ask spreads in the foreign exchange markets. The market microstructure literature argues that bid-ask spread arises due to dealing costs, inventory costs, and adverse selection. However, the literature has struggled to come up with an empirical strategy to identify the three determinants of the bid-ask spread as the measurement requires some inputs that are either non-observable or difficult to quantify. We adopt a novel alternative approach to the estimation of the three components of bid-ask spread in the foreign exchange market, exploiting the implications of exchange rate regimes. For example, in a (credible) fixed regime, bid-ask spreads are solely driven by dealing costs as market makers do not face inventory risk or information asymmetry.

End of Award Report - August 2017

Project Update - April 2017

Project Update - July 2016

RSS Feed Latest news

CERF Fellow Dr. Bang Dang Nguyen - paper will be presented at the AFA Annual Meeting 2020 in San Diego

Sep 26, 2019

Political Connections and Firm Value: Evidence from Close Gubernatorial Elections, joint with Q.A. Do (SciencesPo Paris) and Yen-Teik Lee (Curtin University), is accepted and will be presented at the AFA Annual Meeting 2020 in San Diego.

CERF Scholar Shiqi Chen presented her paper at Leeds University Business School

Jun 28, 2019

Shiqi Chen presented her paper entitled “Financial Policies and Internal Governance with Heterogeneous Risk Preferences” (joint with Bart Lambrecht) in the Accounting and Finance seminar at Leeds University Business School, the Finance seminar at Essex Business School, CERF Lunch Seminar at Cambridge Judge Business School, and at the 2019 Annual Real Options Conference in London.

View all news