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OPTIONS AND THE CURRENCY RISK PREMIUM

Richard K. Lyons

Abstract

AbstractThe following sections are included:IntroductionRisk Premium Theory and Past Empirical ResultsThe simple efficiency hypothesisA portfolio balance model of the risk premiumThe Option Model and Data UsedThe binomial pricing modelInputs for the valuation modelEmpirical ResultsTest of simple efficiencySimple efficiency: adding some structureTest of the portfolio balance modelA final note regarding sterilised interventionConclusionsData AppendixReferences

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Key concepts: Volatility risk premium, Risk premium, Liquidity premium, Economics, Volatility (finance), Econometrics, Currency, Financial economics