Based on the theory of static replication of variance swaps we assess the sign and magnitude of variance risk premiums … general shape of the implied volatility function of the corresponding currency pair. Overall, we conclude that there is a …

We investigate the pricing of volatility risks in currency markets. First, we show that pricing ability of volatility … risk is concentrated in some of its components. Diffusive volatility dominates jump volatility in pricing carry trade … returns, while jump volatility is important in jointly explaining carry trade and momentum returns. Both short-run and long …