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Currency carry trades and the conditional factor model

Ryuta Sakemoto

International Review of Financial Analysis, 2019, vol. 63, issue C, 198-208

Abstract: This study employs a conditional factor model in order to investigate the time-varying profitability of currency carry trades. To that end, I estimate conditional alphas and betas on the popular dollar and carry factors through the use of a nonparametric approach. The empirical results illustrate that the alphas and betas vary over time. Furthermore, I find that the alpha of a high interest rate currency portfolio increases in a trough in a business cycle and in a state of high market uncertainty. However, the beta on the dollar factor decreases in these market conditions, suggesting that investors reduce the foreign currency risk exposure.

Keywords: Currency carry trades; Conditional factor model; Nonparametric estimator; Time-varying beta (search for similar items in EconPapers)
JEL-codes: C14 C58 F31 (search for similar items in EconPapers)
Date: 2019
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