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  5. Asset Pricing: International Finance
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Asset Pricing: International Finance

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Rhythms III
Hosted By: American Finance Association
  • Chair: Ian Martin, London School of Economics

FX Option Volume

Robert Czech
,
Bank of England
Pasquale Della Corte
,
Imperial College London
Shiyang Huang
,
University of Hong Kong
Tianyu Wang
,
Tsinghua University

Abstract

We study the information content of foreign exchange (FX) option volume by exploiting a unique dataset on over-the-counter FX options with counterparty identities and contract characteristics. We find that FX option volume can predict future exchange rate changes, particularly when the convenience yield of US treasuries is high. These findings are consistent with an asymmetric information model in which informed traders trade either in FX option or spot markets. Supporting information-based arguments, we further document that the exchange rate predictability is stronger when using options with higher embedded leverage and around macro-announcement days. Finally, we document that hedge funds and real money investors have superior skills in predicting future exchange rates compared to less sophisticated market participants.

Subjective Risk Premia on Foreign Bonds

Daniel Pesch
,
University of Oxford
Ilaria Piatti
,
Queen Mary University of London
Paul Whelan
,
Copenhagen Business School

Abstract

This paper exploits an international survey dataset on interest rates and exchange rates to argue that, relative to common statistical benchmarks, subjective beliefs appear quite accurate and do not display strong evidence against rational expectations. We use surveys to study the expected return of an economically important investment strategy that buys a foreign long-term bond and sells a long-term U.S bond. Subjective risk premia on this trade are large, time-varying, counter-cyclical, positively correlated with risk proxies and predict future realised returns. Finally, we study implications for the design of structural models by estimating an SDF decomposition into permanent and transitory components.

Global Sales, International Currencies, and the Currency Denomination of Debt

Riccardo Colacito
,
University of North Carolina-Chapel Hill
Yan Qian
,
University of North Carolina-Chapel Hill
Andreas Stathopoulos
,
University of North Carolina-Chapel Hill

Abstract

We document that the currency denomination of the debt of large firms in developed countries is strongly related to the geographical distribution of their sales. Furthermore, those firms exhibit significant home currency bias and international currency bias in debt issuance: controlling for the geography of sales, they borrow more in their home currency and the two most traded currencies, the US dollar and the euro. International currency bias is more pronounced for bonds, consistent with the skew of global investors towards bonds denominated in US dollars and euros. Finally, we find that, since the global financial crisis, the euro bias in debt issuance has been strengthening, with the euro eventually matching the US skew in importance.

Discussant(s)
Travis Johnson
,
University of Texas-Austin
Mikhail Chernov
,
University of California-Los Angeles
Antonio Coppola
,
Harvard University
JEL Classifications
  • G1 - Asset Markets and Pricing