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 Foreign Exchange Predictability During the Financial Crisis written by Stanislav Anatolyev and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study the effectiveness of carry trade strategies during and after the financial crisis using a flexible approach to modeling currency returns. We decompose the currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability than raw returns. We allow the two components to respond to currency-specific risk factors and use the joint conditional distribution of these components to obtain forecasts of future carry trade returns. Our results suggest that the decomposition model produces higher forecast and directional accuracy than any of the competing models. We show that the forecasting gains translate into economically and statistically significant (risk-adjusted) profitability when trading individual currencies or forming currency portfolios based on the predicted returns from the decomposition model.

Download or read book Idiosyncratic Consumption Risk and Predictability of the Carry Trade Premium written by Thomas Nitschka and published by . This book was released on 2008 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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 Term Structure of Currency Carry Trade Risk Premia written by Hanno Lustig and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We find that average returns to currency carry trades decrease significantly as the maturity of the foreign bonds increases, because investment currencies tend to have small local bond term premia. The downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets. We show that long-maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels, since transitory currency risk is automatically hedged by interest rate risk for long-maturity bonds. Our findings imply that there is more cross-border sharing of permanent than transitory shocks.

Download or read book Volatility Risk Premia and Exchange Rate Predictability written by Pasquale Della Corte and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the predictive information content in foreign exchange volatility risk premia for exchange rate returns. The volatility risk premium is the difference between realized volatility and a model-free measure of expected volatility that is derived from currency options, and reflects the cost of insurance against volatility fluctuations in the underlying currency. We find that a portfolio that sells currencies with high insurance costs and buys currencies with low insurance costs generates sizeable out-of-sample returns and Sharpe ratios. These returns are almost entirely obtained via predictability of spot exchange rates rather than interest rate differentials, and these predictable spot returns are far stronger than those from carry trade and momentum strategies. Canonical risk factors cannot price the returns from this strategy, which can be understood, however, in terms of a simple mechanism with time-varying limits to arbitrage.

Download or read book Currency carry trades written by Travis J. Berge and published by . This book was released on 2010 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: A wave of recent research has studied the predictability of foreign currency returns. A wide variety of forecasting structures have been proposed, including signals such as carry, value, momentum, and the forward curve. Some of these have been explored individually, and others have been used in combination. In this paper we use new econometric tools for binary classification problems to evaluate the merits of a general model encompassing all these signals. We find very strong evidence of forecastability using the full set of signals, both in sample and out-of-sample. This holds true for both an unweighted directional forecast and one weighted by returns. Our preferred model generates economically meaningful returns on a portfolio of nine major currencies versus the U.S. dollar, with favorable Sharpe and skewness characteristics. We also find no relationship between our returns and a conventional set of so-called risk factors.

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 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 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 Upside and Downside Risk Exposures of Currency Carry Trades Via Tail Dependence written by Matthew Ames and published by . This book was released on 2014 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: Currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such strategies. That is, according to uncovered interest rate parity (UIP), changes in the related exchange rates should offset the potential to profit from such interest rate differentials. However, it has been shown empirically, that investors can earn profits on average by borrowing in a country with a lower interest rate, exchanging for foreign currency, and investing in a foreign country with a higher interest rate, whilst allowing for any losses from exchanging back to their domestic currency at maturity. This paper explores the financial risk that trading strategies seeking to exploit a violation of the UIP condition are exposed to with respect to multivariate tail dependence present in both the funding and investment currency baskets. It will outline in what contexts these portfolio risk exposures will benefit accumulated portfolio returns and under what conditions such tail exposures will reduce portfolio returns.

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 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.

Download or read book Cross Asset Return Predictability written by Helen Lu and published by . This book was released on 2015 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Equity returns predict carry trade profits from shorting low interest rate currencies. Commodity price changes predict profits from longing high interest rate currencies. The gradual information diffusion hypothesis (Hong & Stein, 1999; Hong, Torous, & Valkanov, 2007) provides a ready explanation for these predictability results. These results cannot be explained by time-varying risk premia as stock returns and commodity price changes significantly predict negative carry trade profits. The predictability is one-directional, from commodities to high interest rate currencies, from commodities to stocks and from stocks to low interest rate currencies.

Download or read book Essays on Carry Trade and Exchange Rate Forecasting written by Gokcen Ogruk and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis is the combination of three papers on carry trade strategies and exchange rate forecasting. The rst paper evaluates the performance of carry trade strategies with implied Taylor rule interest rate di erentials and compares their performance statistics to the naive carry trade strategy with actual interest rates. I argue that the crash risk is reduced with implied Taylor rule interest rate di erentials as a trading strategy in Yen and Franc trades for the whole sample period. During the recent nancial crisis, the carry trading strategies with an implied Taylor rule interest rate perform best in terms of mean returns, risk adjusted returns and downside risk. The second paper evaluates the performance of carry trade strategies with Taylor rule fundamentals in a Markov switching dynamic factor augmented regression framework and compares the performance statistics with the benchmark model of a random walk. I make simulations with the Japanese Yen, Swiss Franc and US Dollar as funding currencies against six target currencies. I argue that risk adjusted returns, mean returns and down-side risk perform best when the Taylor rule is used in a regime switching factor augmented regression framework for Yen and Dollar trades. The results are robust to di erent time periods. In the third paper, I estimate a dynamic factor from the risk premium of bilateral US Dollar against 15 OECD countries, and augment macro fundamentals suggested by Taylor rule, monetary and purchasing power parity models with that factor. I nd evidence of short term predictability of bilateral exchange rates between 1991 and 2012 with factor augmented macro fundamentals.

Download or read book The Financing of Catastrophe Risk written by Kenneth A. Froot and published by University of Chicago Press. This book was released on 2007-12-01 with total page 490 pages. Available in PDF, EPUB and Kindle. Book excerpt: Is it possible that the insurance and reinsurance industries cannot handle a major catastrophe? Ten years ago, the notion that the overall cost of a single catastrophic event might exceed $10 billion was unthinkable. With ever increasing property-casualty risks and unabated growth in hazard-prone areas, insurers and reinsurers now envision the possibility of disaster losses of $50 to $100 billion in the United States. Against this backdrop, the capitalization of the insurance and reinsurance industries has become a crucial concern. While it remains unlikely that a single event might entirely bankrupt these industries, a big catastrophe could place firms under severe stress, jeopardizing both policy holders and investors and causing profound ripple effects throughout the U.S. economy. The Financing of Catastrophe Risk assembles an impressive roster of experts from academia and industry to explore the disturbing yet realistic assumption that a large catastrophic event is inevitable. The essays offer tangible means of both reassessing and raising the level of preparedness throughout the insurance and reinsurance industries.

Download or read book Currency Regimes Volatility Risks and Carry Trades written by Wenliang Guo and published by . This book was released on 2019 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the relationship between cross-sectional carry trade returns and global foreign exchange volatility risk. During periods of high volatility innovations, the average carry trade returns on emerging markets are higher than that of all countries or developed economies. Furthermore, the average returns on managed-float and fixed-rate carry trades are significantly higher than that of free-float carry trade. Government currency intervention in emerging markets can explain these differences. There is an option value in government currency intervention, which can be calculated using an American currency option model with stochastic strikes. This result has policy implications.