The Time-Varying Systematic Risk of Carry Trade Strategies

Charlotte Christiansen, Angelo Ranaldo and Paul Söderllind ()
Additional contact information
Paul Söderllind: Swiss Institute for Banking and Finance, University of St. Gallen, Postal: Rosenbergstr. 52, CH-9000 St. Gallen, Switzerland
Authors registered in the RePEc Author Service: Paul Söderlind

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: To capture time-variation in the risk exposure of exchange rates, this paper suggests a factor model with stock and bond markets as the explanatory factors - but where the betas are allowed to depend on the exchange rate volatility. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy based on 10 currencies from major industrialized countries has much higher exposure to the stock market and also more mean reversion in volatile periods. The findings are robust to various extensions, including adding more currencies and other regime variables.

Keywords: carry trade; factor model; smooth transition regression; time- varying betas (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Pages: 27
Date: 2009-04-21
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/09/rp09_15.pdf (application/pdf)

Related works:
Journal Article: The Time-Varying Systematic Risk of Carry Trade Strategies (2011)
Working Paper: The Time-Varying Systematic Risk of Carry Trade Strategies (2010)
Working Paper: The Time-Varying Systematic Risk of Carry Trade Strategies (2009)
Working Paper: The Time-Varying Systematic Risk of Carry Trade Strategies (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-15

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().