Abstract

We identify a global risk factor in the cross-section of implied volatility returns in cur- rency markets. A zero-cost strategy that buys forward volatility agreements with down- ward sloping implied volatility curves and sells those with upward slopes – a volatility carry strategy – generates significant excess returns. The covariation with volatility carry returns fully explains the cross-sectional variation of our slope-sorted portfolios. The lower the slope, the more the forward volatility agreement is exposed to volatility carry risk.

Publication Type:	Article
Additional Information:	© 2020 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords:	Currency Volatility Risk Premia, Forward Volatility Agreement, Foreign Exchange Volatility, Term Structure
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance

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