Global foreign exchange volatility, ambiguity, and currency carry trades

Takao Asano, Xiaojing Cai and Ryuta Sakemoto

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: This study investigates the relationships between currency portfolios and market conditions. We incorporate information on cross-sectional foreign exchange (FX) volatility and ambiguity to determine FX market regimes. Unlike previous studies, we find that high FX volatility leads to higher currency carry returns only when FX ambiguity is high, suggesting that investors avoid making trading decisions during these periods. As a result, the unwinding of currency carry trades, which is usually associated with high FX volatility and declining in carry trade returns, does not occur. We also observe that this pattern does not emerge in other currency portfolios.

Keywords: Currency portfolio; Carry trades; FX volatility; FX ambiguity (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001281

DOI: 10.1016/j.jbankfin.2025.107508

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