Currency Returns and Liquidity Premiums. Evidence from Higher Moments Portfolio Sorting: Variance, Skewness, and Kurtosis

The currency return has been investigated throughout the literature. However, we look at a different approach using realized variance and higher moments; skewness and kurtosis, to test for the size of return. Introducing these moments, we are able to detect the currency return and the size is pronounced. Then, we investigate further whether liquidity premium exists in currency market by sorting based on higher moments. We find, in fact, that liquidity premium is almost non-existing using skewness and kurtosis measure while using variance can detect the amount of liquidity premium, which is 5.51% per annum. Testing further for liquidity premium during the financial crisis period, we find the size is higher for variance portfolio sorting while skewness and kurtosis sorting does not show any improvement.