IFin Seminar, Paul Whelan, Copenhagen Business School "Subjective Risk Premia in Bond and FX Markets"
Institute of Finance
Date: 15 December 2022 / 12:25 - 13:40
Speaker:Paul Whelan, Copenhagen Business School
Title: "Subjective Risk Premia in Bond and FX Markets"
Room: A-14 (Red Building)
Lugano West Campus
This paper elicits subjective risk premia from an international survey dataset on interest rates and exchange rates. Survey implied risk premia (i) are unconditionally negative for bonds and positive (negative) for investment (funding) currencies; (ii) can be conditionally positive or negative; (iii) vary with subjective macro expectations; (iiv) are positively correlated with quantities of risk; (v) predict future realised returns. Taking beliefs as given, we estimate an asset pricing model with time-variation in economic uncertainty that supports these findings. This demonstrates that subjective risk premia respect a risk-return trade-off regardless of whether they are rational, or not, suggesting that behavioural theories of belief formation can co-exist with rational theories of risk pricing.