Carry Trades: Betting Against Safe Haven

Daniel Kohler ()

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: We examine contagion and flight-to-quality phenomena implied by carry strategies. More specifically, we analyze correlation dynamics between returns on a global equity index and returns on an investment strategy with a long position in high-yield and a short position in low-yield markets. Modeling information spillovers in a multivariate GARCH framework reveals that correlation increases considerably in response to a negative stock market shock. Moreover, a test for symmetry in exceedance correlation shows that correlation is indeed significantly larger for joint market downturns as opposed to joint market upturns. Our findings suggest that conditional correlation exposes carry traders to a severe diversification meltdown in times of global stock market crises.

Keywords: Carry trades; contagion; multivariate GARCH; exceedance correlation (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-04
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (5)

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