Carry and conditional value at risk trend: Capturing the short-, intermediate-, and long-term trends of left-tail risk forecasts

Daniel Hertrich

Journal of International Financial Markets, Institutions and Money, 2023, vol. 82, issue C

Abstract: Given the empirical evidence that investors underreact to bad news, we examine the ability of changes in the Conditional Value at Risk (CVaR) to predict the cross-section of currency excess returns. Therefore, we introduce a variable CVaR-Trend to capture the short-, intermediate- and long-term trends of CVaR forecasts. We find that the relationship between CVaR-Trend and expected G-10 currency excess returns depends on conditioning on different regimes of FX forward discount. Our results imply a novel long-short currency trading strategy, named CVaR-Trend trade, that generates high excess returns that cannot be explained by exposure to the most common currency risk factors in both funding and investment markets.

Keywords: Carry trade; Left-tail risk; CVaR; Trends; Investor underreaction (search for similar items in EconPapers)
JEL-codes: F31 G11 G17 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:82:y:2023:i:c:s1042443122001822

DOI: 10.1016/j.intfin.2022.101710

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