Download or read book Carry Trade Returns and Segmented Risk Pricing written by Gordon Schulze and published by . This book was released on 2019 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: The returns to carry trades are controversially discussed as there seems to be no unifying risk-based explanation of currency returns and stock returns. This paper addresses carry trade returns from a risk pricing perspective and examines if these returns can be connected to persistent cross-country differences of risk aversion. Therefore, I analyze a data set of individual carry trade currencies. Based on a GMM estimation, I find significantly large and persistent cross-country differences of risk aversion in the interest rate market compared to the implied risk aversion in the stock market. In this context, investment currencies are more sensitive to U.S. consumption risk while funding currencies provide a hedge. However, this also implies that there is no unifying SDF and consequently, both the interest rate market and the stock market appear to be segmented in risk pricing for carry trade countries.
Download or read book Common Information in Carry Trade Risk Factors written by Joseph Byrne and published by . This book was released on 2016 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.
Download or read book Carry Trades and Tail Risk of Exchange Rates written by Chanaka N. Ganepola and published by . This book was released on 2018 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Historically, Carry trades have been a success story for most investor and a major source of funds for emerging economies maintaining higher interest rates. Therefore it's a timely topic to investigate the risk embedded in such transactions and to what extent the carry trade returns explain the tail risk. Initially, this research estimates the tail index of all the currencies and formulates a unique inverse function for all the currencies in relation to Power laws, with the idea of estimating the respective Value-at-Risk. This research considers twenty five currencies and replicates them in to five portfolios based on the annualised daily return of a weekly forward contract. Trade was executed assuming a U.S. investor, who goes long in a high return portfolio and short in a low return portfolio. Further, this research examines the impact of carry trade returns on the overall tail risk within the context of foreign exchange and interest rate gain in long and short positions of the trade. The results indicate that tail risk cannot be explained effectively by its returns because of its exponential nature. However, I find that tail risk is mostly influenced by the long position of the carry trade. Furthermore, the return of the foreign exchange component appears to have a better explanation on the tail risk compared to the interest rate return. The Value-at-Risk analysis also suggests that the tail risk of overall strategy is influenced by the tail risk of foreign exchange component embedded in the long position of the trade.
Download or read book The Tail Risk Premia of the Carry Trades written by Philippe Dupuy and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the relationship between the excess returns of portfolios invested in carry trade positions and a set of candidate risk factors including an innovative tail risk factor. We find that high interest rate currencies are related to innovations in global currency tail risk. They deliver low returns in time of unexpected high tail risk and high returns in time of unexpected low tail risk suggesting a standard Asset Pricing Theory approach to explaining the returns to the carry trade. Furthermore, our tail risk factor seems to price the returns to the carry trade better than factors such as volatility or skewness tested earlier in the literature. This result is natural because, by its construction, our indicator aggregates in one single variable all the information that these concurrent factors convey. And it makes sense since the ultimate risk for carry traders is to reach their funding limits which are set, because of the regulations, on the back of tail risk statistics (Value at Risk) and not simply on the back of the volatility or the skewness alone. The result holds whether the global tail risk indicators are estimated in the currency, the equity or the bond market.
Download or read book Carry Trades and Risk written by Craig Burnside and published by . This book was released on 2011 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Carry trades, in which an investor borrows a low interest rate currency and lends a high interest rate currency, have been profitable historically. The risk exposure of carry traders might explain their high returns, but conventional models of risk do not work because traditional risk factors, used to price the stock market, do not price currency returns. Less traditional factors that are more successful in explaining currency returns, are, however, unsuccessful in explaining the returns to the stock market. More exotic models of "crisis risk" are another possibility, but I show that any time-variation in the exposure of the carry trade to market risk has been insufficient, in sample, to explain the average returns earned by carry traders. Instead, peso events remain a candidate explanation of the returns to the carry trade -- National Bureau of Economic Research web site.
Download or read book FX Liquidity Risk and Carry Trade Returns written by Samuel Abankwa and published by . This book was released on 2015 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the effects of FX liquidity risk on carry trade returns using a low-frequency market-wide liquidity measure. We show that a liquidity-based ranking of currency pairs can be used to construct a mimicking liquidity risk factor, which helps in explaining the variation of carry trade returns across exchange rate regimes. In a liquidity-adjusted asset pricing framework, we show that the vast majority of variation in carry trade returns during any exchange rate regime can be explained by two risk factors (market and liquidity risk) in the FX market. Our results are further corroborated when the hedge liquidity risk factor is replaced with a non-tradable innovations risk factor.
Download or read book The Effect of Risk Changes on Carry Trade Returns and Speculative Behavior written by Felix Dietrich and published by . This book was released on 2018 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the time-series reaction of carry trade returns to changes in various risk factors. Using non-linear methods, I find that implied currency volatility is an informative time-series predictor. Increases (declines) in the implied currency volatility (or, generally, perceptions of future risk) result in lower (higher) subsequent carry trade returns. The reaction to extreme changes in these risk perceptions is even more pronounced. Using futures positioning data, it is shown that speculators tend to sell carry trade positions upon a perception of increased risk and vice versa. A piecewise linear threshold model is proposed to predict short-term carry trade returns; it outperforms a variety of benchmarks (including the random walk) on almost all metrics. Robustness tests suggest that this performance does not depend on certain model settings or the sample period (i.e. data mining); instead, a rollingly updated model would lead to even better results.
Download or read book Explaining the Returns to the Carry Trade written by Maya Bandia and published by . This book was released on 2021 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Carry and Trend Following Returns in the Foreign Exchange Market written by and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Foreign Exchange Risk and the Predictability of Carry Trade Returns written by Gino Cenedese and published by . This book was released on 2014 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides an empirical investigation of the time-series predictive ability of foreign exchange risk measures on the return to the carry trade, a popular investment strategy that borrows in low-interest currencies and lends in high-interest currencies. Using quantile regressions, we find that higher market variance is significantly related to large future carry trade losses, which is consistent with the unwinding of the carry trade in times of high volatility. The decomposition of market variance into average variance and average correlation shows that the predictive power of market variance is primarily due to average variance since average correlation is not significantly related to carry trade returns. Finally, a new version of the carry trade that conditions on market variance generates performance gains net of transaction costs.
Download or read book The Carry Trade and Implied Moment Risk written by Michael Broll and published by . This book was released on 2016 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: The carry trade is a zero net investment strategy that borrows in low yielding currencies and subsequently invests in high yielding currencies. It has been identified as highly profitable FX strategy delivering significantly excess returns with high Sharpe ratios. This paper shows that these excess returns are especially compensation for bearing FX variance and negative skewness risk. Additionally, factor risks that affect foreign money changes, foreign inflation changes, as well as changes to a newly developed Carry Trade Activity Index and the VIX index, as a proxy for global risk aversion, make up the carry trade risk anatomy. These findings are not exclusively important for carry traders, but also contribute to the understanding of currency risk in the cross-section. This is directly linked to asset pricing tests from Lustig et al. (2011), which have shown that currency baskets sorted on their interest rate differentials are all exposed to carry trade returns as a risk factor. Furthermore, this paper finds evidence that a decreased level of funding liquidity potentially leads to carry trade unwindings, controlling for equity and FX implied variance and skewness effects, which supports the theoretical model of liquidity spirals developed by Brunnermeier and Pedersen (2009).
Download or read book The Determinants of Carry Trade Risk Premia written by Aidan Corcoran and published by . This book was released on 2011 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper tests a factor-based explanation for positive excess carry trade returns. Equity market risk of the countries in the carry trade portfolio, a new factor in the literature, is significantly priced after controlling for commonly cited factors. One motivation for this factor is via changes in investors' allocations between equity and safer instruments brought about by changes in risk aversion. Strong equity returns in funding currencies are associated with weak carry trade returns, and vice versa, however equity betas are subject to significant time variation.
Download or read book The Carry Trade Risk Factor on U S Stock Returns written by Jairo Andrés Rendón and published by . This book was released on 2011 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Carry trades and global foreign exchange volatility written by Lukas Menkhoff and published by . This book was released on 2011 with total page 90 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Using Option Implied Information to Improve Currency Carry Trade Profits written by Michael Broll and published by . This book was released on 2017 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates an efficient parametric portfolio policy model to improve the return distribution of the well-known currency carry trade investment strategy. This carry trade strategy invests into high-yielding currencies that are subsequently funded by low-yielding currencies. Following this investment procedure has led to significantly excess returns for the investors, at least over the past four decades. However, these returns were subject to a high crash risk, which hit its peak during the US subprime crisis in 2008/2009 with portfolio losses of up to one third of the investment value. The constructed model overcomes these bad portfolio properties through computing the optimal carry trade portfolio weight for any monthly revolving investment period. This is done by modeling the optimal weight as a function of the carry trade's risk characteristics. Especially, when using global FX option-implied variance risk, as well as global consumer price inflation and commodity prices as background risk factors, the model delivers extremely-efficient out-of-sample results with annualized mean returns of up to 8.4% over an eight-year period, accompanied with a low standard deviation, positively skewed returns and leading to Sharpe ratios around unity, including transaction costs. These promising statistics are largely maintained when allowing for higher leveraged portfolios.
Download or read book Carry Trades and Global Foreign Exchange Volatility written by and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the relation between global foreign exchange (FX) volatility risk and the cross-section of excess returns arising from popular strategies that borrow in low interest rate currencies and invest in high-interest rate currencies, so-called 'carry trades'. We find that high interest rate currencies are negatively related to innovations in global FX volatility and thus deliver low returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding positive returns. Our proxy for global FX volatility risk captures more than 90% of the cross-sectional excess returns in five carry trade portfolios. In turn, these results provide evidence that there is an economically meaningful risk-return relation in the FX market. Further analysis shows that liquidity risk also matters for expected FX returns, but to a lesser degree than volatility risk. Finally, exposure to our volatility risk proxy also performs well for pricing returns of other cross sections in foreign exchange, U.S. equity, and corporate bond markets.
Download or read book Handbook of Exchange Rates written by Jessica James and published by John Wiley & Sons. This book was released on 2012-05-29 with total page 674 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Handbook of Exchange Rates “This book is remarkable. I expect it to become the anchor reference for people working in the foreign exchange field.” —Richard K. Lyons, Dean and Professor of Finance, Haas School of Business, University of California Berkeley “It is quite easily the most wide ranging treaty of expertise on the forex market I have ever come across. I will be keeping a copy close to my fingertips.” —Jim O’Neill, Chairman, Goldman Sachs Asset Management How should we evaluate the forecasting power of models? What are appropriate loss functions for major market participants? Is the exchange rate the only means of adjustment? Handbook of Exchange Rates answers these questions and many more, equipping readers with the relevant concepts and policies for working in today’s international economic climate. Featuring contributions written by leading specialists from the global financial arena, this handbook provides a collection of original ideas on foreign exchange (FX) rates in four succinct sections: • Overview introduces the history of the FX market and exchange rate regimes, discussing key instruments in the trading environment as well as macro and micro approaches to FX determination. • Exchange Rate Models and Methods focuses on forecasting exchange rates, featuring methodological contributions on the statistical methods for evaluating forecast performance, parity relationships, fair value models, and flow–based models. • FX Markets and Products outlines active currency management, currency hedging, hedge accounting; high frequency and algorithmic trading in FX; and FX strategy-based products. • FX Markets and Policy explores the current policies in place in global markets and presents a framework for analyzing financial crises. Throughout the book, topics are explored in-depth alongside their founding principles. Each chapter uses real-world examples from the financial industry and concludes with a summary that outlines key points and concepts. Handbook of Exchange Rates is an essential reference for fund managers and investors as well as practitioners and researchers working in finance, banking, business, and econometrics. The book also serves as a valuable supplement for courses on economics, business, and international finance at the upper-undergraduate and graduate levels.
