Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

Riza Demirer, Rangan Gupta, Hossein Hassani and Xu Huang
Additional contact information
Hossein Hassani: Research Institute of Energy Management and Planning (RIEMP), University of Tehran, Tehran 1417466191, Iran
Xu Huang: Faculty of Business and Law, De Montfort University, Leicester LE1 9BH, UK

Economies, 2020, vol. 8, issue 1, 1-12

Abstract: This paper examines the predictive power of time-varying risk aversion over payoffs to the carry trade strategy via the cross-quantilogram methodology. Our analysis yields significant evidence of directional predictability from risk aversion to daily carry trade returns tracked by the Deutsche Bank G10 Currency Future Harvest Total Return Index. The predictive power of risk aversion is found to be stronger during periods of moderate to high risk aversion and largely concentrated on extreme fluctuations in carry trade returns. While large crashes in carry trade returns are associated with significant rises in investors’ risk aversion, we also found that booms in carry trade returns can be predicted at high quantiles of risk aversion. The results highlight the predictive role of extreme investor sentiment in currency markets and regime specific patterns in carry trade returns that can be captured via quantile-based predictive models.

Keywords: quantile; correlogram; dependence; predictability (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:8:y:2020:i:1:p:18-:d:329010

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