Dollar carry timing

Thiago de Oliveira Souza

No 10/2020, Discussion Papers on Economics from University of Southern Denmark, Department of Economics

Abstract: Dollar carry trade risk premiums – unlike dollar-neutral or foreign exchange carry risk premiums – are positively correlated with firm-level dispersions in investment, profitability, and book-to-market in addition to the Treasury-bill rate, long term bond yield, term spread, and default spread. Several forecasting models pin down the few periods responsible for the entire premium, based on these proxies for the latent risk and price of risk states in the U.S. (and its business cycle). This predictability is also statistically and economically significant out of sample: It generates Sharpe ratios as large as 1.37 (compared to 0.44 unconditionally), for example.

Keywords: Carry trade; risk premium; business cycle; microeconomic dispersion; foreign exchange (search for similar items in EconPapers)
JEL-codes: D25 E32 F31 G11 G12 G15 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2020-10-21
New Economics Papers: this item is included in nep-mac and nep-ore
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