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The Time-Varying Risk Price of Currency Carry Trades

Joseph Byrne (), Boulis Maher Ibrahim and Ryuta Sakemoto

MPRA Paper from University Library of Munich, Germany

Abstract: Recent studies show that carry trade returns are predictable and this predictability reflects changes in expected returns. Changes in expected returns may be related to time variation in betas and risk prices. We investigate this issue in carry trades and find clear evidence of time-varying risk prices for the carry factor (HMLFX). The results further indicate that time-varying risk prices are more important than time-varying betas for the carry trade asset pricing model. This suggests that investors overreact to changes in economic states.

Keywords: Currency Carry Trades; Exchange Rate; Risk Price; Time-varying Betas; Factor Model; Nonparametric Model; FX market. (search for similar items in EconPapers)
JEL-codes: C58 E44 F31 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-08-14
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