The Time-Varying Systematic Risk of Carry Trade Strategies

Item Type	Journal paper
Abstract	We explain the currency carry trade (CT) performance using an asset pricing model in which factor loadings are regime dependent rather than constant. Empirical results show that a typical CT strategy has much higher exposure to the stock market and is mean reverting in regimes of high foreign exchange volatility. The findings are robust to various extensions. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the CT performance is better explained by a time-varying systematic risk that increases in volatile markets, suggesting a partial resolution of the uncovered interest parity puzzle.
Authors	Christiansen, Charlotte; Ranaldo, Angelo & Söderlind, Paul
Journal or Publication Title	Journal of Financial and Quantitative Analysis
Language	English
Subjects	economics
HSG Classification	contribution to scientific community
Refereed	Yes
Date	1 August 2011
Publisher	Cambridge University Press
Place of Publication	Cambridge
Volume	46
Number	4
Page Range	1107-1125
Number of Pages	19
ISSN	0022-1090
ISSN-Digital	1756-6916
Publisher DOI	https://doi.org/10.1017/S0022109011000263
Depositing User	Prof. PhD. Paul Söderlind
Date Deposited	04 Mar 2010 14:42
Last Modified	20 Jul 2022 16:58
URI:	https://www.alexandria.unisg.ch/publications/60624

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Christiansen, Charlotte; Ranaldo, Angelo & Söderlind, Paul (2011) The Time-Varying Systematic Risk of Carry Trade Strategies. Journal of Financial and Quantitative Analysis, 46 (4). 1107-1125. ISSN 0022-1090

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https://www.alexandria.unisg.ch/id/eprint/60624

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