Risk Premium

A Mean-Reverting Model of Exchange Rate Risk Premium Using Ornstein-Uhlenbeck Dynamics ArXiv ID: 2504.06028 “View on arXiv” Authors: Unknown Abstract This paper examines the empirical failure of uncovered interest parity (UIP) and proposes a structural explanation based on a mean-reverting risk premium. We define a realized premium as the deviation between observed exchange rate returns and the interest rate differential, and demonstrate its strong mean-reverting behavior across multiple horizons. Motivated by this pattern, we model the risk premium using an Ornstein-Uhlenbeck (OU) process embedded within a stochastic differential equation for the exchange rate. Our model yields closed-form approximations for future exchange rate distributions, which we evaluate using coverage-based backtesting. Applied to USD/KRW data from 2010 to 2025, the model shows strong predictive performance at both short-term and long-term horizons, while underperforming at intermediate (3-month) horizons and showing conservative behavior in the tails of long-term forecasts. These results suggest that exchange rate deviations from UIP may reflect structured, forecastable dynamics rather than pure noise, and point to future modeling improvements via regime-switching or time-varying volatility. ...

Dynamic Latent-Factor Model with High-Dimensional Asset Characteristics ArXiv ID: 2405.15721 “View on arXiv” Authors: Unknown Abstract We develop novel estimation procedures with supporting econometric theory for a dynamic latent-factor model with high-dimensional asset characteristics, that is, the number of characteristics is on the order of the sample size. Utilizing the Double Selection Lasso estimator, our procedure employs regularization to eliminate characteristics with low signal-to-noise ratios yet maintains asymptotically valid inference for asset pricing tests. The crypto asset class is well-suited for applying this model given the limited number of tradable assets and years of data as well as the rich set of available asset characteristics. The empirical results present out-of-sample pricing abilities and risk-adjusted returns for our novel estimator as compared to benchmark methods. We provide an inference procedure for measuring the risk premium of an observable nontradable factor, and employ this to find that the inflation-mimicking portfolio in the crypto asset class has positive risk compensation. ...

Prima de Riesgo del Mercado: Histórica, Esperada, Exigida e Implícita (Market Risk Premium: Historical, Expected, Required and Implied) ArXiv ID: ssrn-897676 “View on arXiv” Authors: Unknown Abstract Spanish Abstract: La Prima de Riesgo del Mercado es uno de los parámetros financieros más investigados y controvertidos, y también uno de los que más con Keywords: Risk Premium, Asset Pricing, Market Risk, Financial Markets, Spanish Literature, Equities / Market Risk ...