The Time-Varying Systematic Risk of Carry Trade Strategies

Paul Söderlind, Angelo Ranaldo and Charlotte Christiansen

University of St. Gallen Department of Economics working paper series 2009 from Department of Economics, University of St. Gallen

Abstract: This paper suggests a factor model for carry trade strategies where the regression coefficients are allowed to depend on market volatility and liquidity. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy has much higher exposure to the stock market and also more mean reversion in volatile periods - and that FX market volatility is a priced risk factor. The findings are robust to various extensions, including using more currencies and other proxies for volatility and liquidity (VIX, TED and a bid-ask spread).

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 pages
Date: 2009-04
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://ux-tauri.unisg.ch/RePEc/usg/dp2009/DP-0906-So.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)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:dp2009:2009-06

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