The role of asymmetry and dynamics in carry trade and general financial markets

Chang‐Che Wu, MeiChi Huang and Chih‐Chiang Wu

The Financial Review, 2021, vol. 56, issue 2, 331-353

Abstract: This study investigates asymmetric dependence and its dynamics across returns to carry trades, stocks, and bonds using a copula‐based model. We show evidence for a significant increase in carry trade‐stock dependence and substantially negative carry trade‐bond and stock‐bond comovements since the 2007–2008 global financial crisis. We also assess the out‐of‐sample predictability of dependence in the context of asset‐allocation strategies, and find that risk‐averse investors obtain significant economic values by incorporating asymmetry and dynamics into dependence timing, particularly in the 2007–2008 crisis. These findings provide new implications for asset‐allocation strategies and risk management during turbulent market phases.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:56:y:2021:i:2:p:331-353

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