Understanding the price of volatility risk in carry trades

Shamim Ahmed and Giorgio Valente ()

Journal of Banking & Finance, 2015, vol. 57, issue C, 118-129

Abstract: This paper investigates the cross-sectional pricing ability of the short- and long-run components of global foreign exchange (FX) volatility for carry trade returns. We find a negative and statistically significant factor risk price for the long-run component, but no significant pricing effect due to the short-run volatility component. We also document that the dynamics of the long-run component of global FX volatility are related to US macroeconomic fundamentals. Our results are robust to various parametrizations of the volatility models used to obtain the volatility components and they are invariant to alternative asset pricing testing methodologies and sample periods.

Keywords: Carry trade; Forward premium puzzle; Volatility risk (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:57:y:2015:i:c:p:118-129

DOI: 10.1016/j.jbankfin.2015.04.002

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