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Skewness Risk Premia and the Cross Section of Currency Returns

Published online by Cambridge University Press:  02 September 2025

Junye Li Open the ORCID record for Junye Li [Opens in a new window] ,
Lucio Sarno Open the ORCID record for Lucio Sarno [Opens in a new window]  and
Gabriele Zinna
Junye Li
Affiliation:
Fudan University li_junye@fudan.edu.cn
Lucio Sarno*
Affiliation:
Cambridge Judge Business School and Girton College, University of Cambridge , and Centre for Economic Policy Research (CEPR)
Gabriele Zinna
Affiliation:
Bank of Italy gabriele.zinna@bancaditalia.it
*
l.sarno@jbs.cam.ac.uk (corresponding author)
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Abstract

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Using model-free skewness measures that exploit the asymmetry in semivariances and option data from the over-the-counter currency market, we find that buying currencies with a high skewness risk premium (SRP) and selling currencies with a low SRP generates high returns and a Sharpe ratio. Asset pricing tests—which control for omitted variables and measurement errors—show that a SRP factor enters the currency pricing kernel and is central to the pricing of risks inherent in a broad currency cross section of 60 portfolio excess returns. These results imply that skewness risk is a strong and priced source of currency risk.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 39
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are indebted for constructive comments and suggestions to George G. Pennacchi (the editor), an anonymous referee, Tim Bollerslev, Stefanos Delikouras, Pasquale Della Corte, Wenxin Du, Massimo Guidolin, Alex Kostakis, Roman Kozhan, Anthony Neuberger, Chris Povey, Paul Schneider, Xiao Xiao, Irina Zviadadze, and participants at presentations held at the University of Liverpool, the 10th Italian Congress of Econometrics and Empirical Economics (2023), the 2023 SoFiE Annual Conference, and the 10th Asset Pricing Workshop at the University of York. J. Li acknowledges financial support from National Science Foundation of China [Grant 72473026]. All errors are our responsibility. This research was partly carried out l.sarno@jbs.cam.ac.uk (corresponding awhen Gabriele Zinna was Visiting Scholar at Amsterdam Business School and Tilburg University. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Italy. For the purpose of open access, the authors have applied a Creative Commons Attribution (CC BY) licence to any Author Accepted Manuscript version arising from this submission.

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