@article{611de21206084eb0838a2ad380fe7220,
title = "The yen–dollar risk premium: A story of regime shifts in bond markets",
abstract = "We document a new risk premium in the yen–dollar currency pair that compensates for the uncertainty over regime shifts in the bond market. We estimate a no-arbitrage regime-switching term structure model, where the transition of volatility regimes is driven by the level of yields and is associated with a regime risk premium. We find that the currency excess return is explained by the regime risk premium in Japan in the second half of 1990s and in the US at the height of the Great Recession. The regime risk premium contains information beyond the affine model, the forward premium, and the carry and dollar factors.",
keywords = "Exchange rates, Regime switching, Term structure",
author = "Sungjun Cho and Stuart Hyde and Liu Liu",
note = "Funding Information: We would like to thank Michael Brennan, Jerry Coakley, Fernando Eguren-Martin, Massimo Guidolin, Masar Hadla, Neil Kellard, Alex Kostakis, Kian Ong, Christian Schlag, Ahmet Ali Taskin for their suggestions. We received useful comments from the seminar participants at Alliance Manchester Business School, Goethe University Frankfurt, INFINITI Conference on International Finance (2017, Val?ncia), Annual Meeting of the German Finance Association (2017, Ulm), the 2nd Workshop on Financial Econometrics and Empirical Modeling of Financial Markets (2018, Kiel), and the Asian Meeting of the Econometric Society (2019, Xiamen). Publisher Copyright: {\textcopyright} 2022 Elsevier B.V.",
year = "2022",
month = may,
doi = "10.1016/j.intfin.2022.101531",
language = "English",
volume = "78",
journal = "Journal of International Financial Markets, Institutions and Money",
issn = "1042-4431",
publisher = "Elsevier BV",
}