Intertemporal Risk-Return Trade-off in Foreign Exchange Rates

We investigate the intertemporal risk-return trade-off of foreign ex- change (FX) rates for ten currencies quoted against the USD. For each currency, we use three risk measures simultaneously that pertain to that currency; its realized volatility, its realized skewness, and its value-at-risk. We apply monthly FX excess returns and monthly FX risk measures calculated from daily observations. We find that there is a positive and signi?cant contemporaneous risk-return trade-off for most currencies. There is no evidence of noncontemporaneous risk-return trade-off. The risk-return trade-off changes during the recent financial crisis in that it becomes nonexistent for several currencies and negative for others.