Differences In Beliefs And Currency Risk Premia

LONDON - June 27, 2013 - PRLog -- Cass Business School’s academics have recently explored the importance of different beliefs for the dynamics of asset prices. This topic has fascinated academics for years, and has led to an extensive back catalogue of information and literature on this very subject. Led by Alessandro Beber, a Cass Professor in Finance who has years of research experience, the most recent study has found that over recent years, standard asset pricing theories have had trouble explaining episodes not linked to fundamentals. For example, this can be seen in the equity premium puzzle and the excess volatility puzzle, both examples of the dynamics of capital markets.

The focus of this business research was on currency markets. The lack of short-selling constraints on this market in particular allowed the Cass researchers to perform much more incisive tests and of their theoretical predictions. Option and underlying markets were examined as part of the study in order to gain an in depth understanding of a richer array of empirical implications, including matrices such as volatility risk premia and expected returns. (http://www.cassknowledge.com/sites/default/files/article-...)

Based on the foreign exchange forecasts of 50 different participants in the currency market over the course of more than a decade, an empirical proxy for differences in beliefs was created by the Cass academics. From the evidence they found that the uncertainty about fundamentals was important to pricing implications.

Cass Business School delivers top quality business research (http://www.cassknowledge.com/research) to a wide range of different sectors. This comes as part of its Cass Knowledge service, which also delivers information for business through its InBusiness magazine and a number of informative videos and podcasts in order to ensure that business has all the knowledge it requires to perform.