Heterogeneous beliefs in macroeconomic growth prospects and the carry risk premium

Sunjin Park

Journal of Banking & Finance, 2022, vol. 136, issue C

Abstract: To understand macroeconomic risks underlying currency carry trades, I propose exploiting rich source of information from analysts’ economic growth forecasts. Specifically, I obtain measures of global growth prospects from the cross-analyst distribution of real GDP growth forecasts. I find that the global measure of skewness in forecasts negatively predicts returns both for the G10 carry and for the carry based on a wide range of currencies. The global skewness measure is found to play a more robust role compared to the global expected growth or dispersion measure. Using a model of heterogeneous beliefs, I illustrate that the consumption risk of the unbiased agent can increase because of the presence of a pessimist, who negatively skews the forecast distribution. The additional consumption risk translates to higher currency risk, introducing a source of the carry risk premium.

Keywords: Foreign exchange rate; Carry trade; Macroeconomic forecast; Heterogeneous beliefs (search for similar items in EconPapers)
JEL-codes: D84 F30 G11 G12 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426621003447
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621003447

DOI: 10.1016/j.jbankfin.2021.106393

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().