The impact of jumps on carry trade returns
Suzanne S. Lee and
Journal of Financial Economics, 2019, vol. 131, issue 2, 433-455
This paper investigates how jump risks are priced in currency markets. We find that currencies whose changes are more sensitive to negative market jumps provide significantly higher expected returns. The positive risk premium constitutes compensation for the extreme losses during periods of market turmoil. Using the empirical findings, we propose a jump modified carry trade strategy, which has approximately two-percentage-point (per annum) higher returns than the regular carry trade strategy. These findings result from the fact that negative jump betas are significantly related to the riskiness of currencies and business conditions.
Keywords: Jump beta; Jump modified carry trade; Foreign exchange rate; Carry trade (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:2:p:433-455
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