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Discussion Paper Details

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Title: The Time-Varying Systematic Risk of Carry Trade Strategies

Author(s): Charlotte Christiansen, Angelo Ranaldo and Paul Söderlind

Publication Date: June 2009

Keyword(s): carry trade, factor model, smooth transition regression and time-varying betas

Programme Area(s): International Macroeconomics

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).

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Bibliographic Reference

Christiansen, C, Ranaldo, A and Söderlind, P. 2009. 'The Time-Varying Systematic Risk of Carry Trade Strategies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7345