Looking at the other side of carry trades: Are there any safe haven currencies?
Virginie Coudert (),
Cyriac Guillaumin and
No 2014-13, EconomiX Working Papers from University of Paris Nanterre, EconomiX
We define “safe haven currencies” as those able to yield positive excess returns during crises and show that they are likely to have negative risk premia on the long-run. We try to identify them empirically by considering a sample of 26 currencies from advanced and emerging countries over a period spanning from 1999 to 2013. We first spot the currencies yielding negative mean excess returns over the long run and positive ones during crises; only the Japanese yen (JPY) and the US dollar (USD) meet these conditions. Second, we run a smooth transition regression (STR) of the Fama equation, in which we add the VIX as an explanatory and a transition variable, in order to capture the response of exchange rates over the global financial cycle. The results also point out to the USD and the JPY as the only candidates for a safe haven role; despite its long-run appreciation trend, the Swiss franc does not qualify for this role, as it tends to follow the downward movement of the euro during the recent financial turmoil.
Keywords: Carry trades; safe haven currencies; financial cycle (search for similar items in EconPapers)
JEL-codes: C32 G11 G15 (search for similar items in EconPapers)
Pages: 31 pages
New Economics Papers: this item is included in nep-mon
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Working Paper: Looking at the Other Side of Carry Trades: Are there any Safe Haven Currencies? (2014)
Working Paper: Looking at the other side of carry trades: Are there any safe haven currencies? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2014-13
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