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Systemic risk in carry-trade portfolios

Chih-Liang Liu and Hsin-Feng Yang

Finance Research Letters, 2017, vol. 20, issue C, 40-46

Abstract: Risk contagion between carry trade portfolios and stock markets had been explored in literatures, leaving inconsistent controversy. Instead of exploring ordinary return-volatility spillovers, this paper focuses on a systemic contagion, the tail risk conditional on extreme events in other markets. Using a conditional value-at-risk (CoVaR) model, we contribute to this line of literature by showing that there is bilateral systemic contagion between carry trades and stock markets in the U.S., European, or Asia-Pacific regions. Such a systemic contagion is particularly significant during the 2000–2001 dot-com bubble and 2007–2009U.S. credit crisis.

Keywords: Carry trade; Systemic contagion; CoVaR model; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G15 G21 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:40-46