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| Author: | Beber, A. Breedon, F. Buraschi, A. |
| Title: | Differences in beliefs and currency risk premiums |
| Journal: | Journal of Financial Economics
2010 : DEC, VOL. 98:3 p. 415-438 |
| Index terms: | option valuation market research foreign exchange assets volatility currency |
| Language: | eng |
| Abstract: | This paper examines the importance of heterogeneous beliefs for the dynamics of asset prices. The focus is on currency markets, where the absence of short-selling constraints makes it possible perform sharper tests of theoretical predictions. Using a unique data set with detailed information on foreign-exchange forecasts, an empirical proxy is constructed for differences in beliefs. It is shown that this proxy has a strong effect on the implied volatility of currency options beyond the volatility of macroeconomic fundamentals. It is documented that differences in beliefs impact also on the shape of the implied volatility smile, on the volatility risk-premiums, and on future currency returns. |
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