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
Institute/School s/bf - Swiss Institute of Banking and Finance
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 10.1017/S0022109011000263
Depositing User Prof. PhD. Paul Söderlind
Date Deposited 04 Mar 2010 14:42
Last Modified 23 Aug 2016 11:07
URI: https://www.alexandria.unisg.ch/publications/60624

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Citation

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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