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Carry trades and commodity risk factors

Joseph Byrne (), Boulis Maher Ibrahim and Ryuta Sakemoto

Journal of International Money and Finance, 2019, vol. 96, issue C, 121-129

Abstract: This paper investigates the importance of commodity prices for the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock.

Keywords: Currency carry trade; Commodity price; Factor model; Hierarchical model; Emerging currencies (search for similar items in EconPapers)
JEL-codes: C58 F31 G12 G15 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Carry Trades and Commodity Risk Factors (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:96:y:2019:i:c:p:121-129

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