The Time-Varying Systematic Risk of Carry Trade Strategies
Journal
Journal of Financial and Quantitative Analysis
ISSN
0022-1090
ISSN-Digital
1756-6916
Type
journal article
Date Issued
2011-08-01
Author(s)
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.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Cambridge University Press
Publisher place
Cambridge
Volume
46
Number
4
Start page
1107
End page
1125
Pages
19
Subject(s)
Eprints ID
60624
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