Currency carry trade regimes: Beyond the Fama regression

Richard Clarida, Josh Davis and Niels Pedersen

Journal of International Money and Finance, 2009, vol. 28, issue 8, 1375-1389

Abstract: We show that carry trade strategies resemble FX option strategies that sell out of the money puts on high interest rate currencies. Both strategies collect premiums to generate persistent excess returns that unwind sharply when volatility increases. We also show that the widely documented negative slope coefficient in regressions of exchange rate depreciation on forward currency premiums is an artifact of the volatility regime. In high volatility regimes, the so-called Fama regression produces a positive coefficient greater than unity. We finally document the existence of an intuitive co-movement between currency risk premiums and yield curve risk factors.

Keywords: Currency; carry; trade; Risk; premium; Fama; Yield; curve; risk; premia (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (122)

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Working Paper: Currency Carry Trade Regimes: Beyond the Fama Regression (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:28:y:2009:i:8:p:1375-1389

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