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http://ssrn.com/abstract=1392764
 
 

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The Time-Varying Systematic Risk of Carry Trade Strategies


Charlotte Christiansen


Aarhus University - CREATES

Angelo Ranaldo


University of St. Gallen; University of St. Gallen - SoF: School of Finance

Paul Söderlind


University of St. Gallen; Centre for Economic Policy Research (CEPR); University of St. Gallen - SoF: School of Finance

February 3, 2010

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:     
We explain the currency carry trade performance using an asset pricing model in which factor loadings are regime-dependent rather than constant. Empirical results show that a typical carry trade strategy has much higher exposure to the stock market and is mean-reverting in regimes of high FX volatility. The findings are robust to various extensions. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the carry trade performance is better explained by a time-varying systematic risk that increases in volatile markets, suggesting a partial resolution of the Uncovered Interest Rate parity puzzle.

Number of Pages in PDF File: 26

Keywords: carry trade, factor model, FX volatility, liquidity, smooth transition regression, time-varying betas

JEL Classification: F31, G15, G11

working papers series


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Date posted: April 23, 2009 ; Last revised: June 11, 2013

Suggested Citation

Christiansen, Charlotte and Ranaldo, Angelo and Söderlind, Paul, The Time-Varying Systematic Risk of Carry Trade Strategies (February 3, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1392764 or http://dx.doi.org/10.2139/ssrn.1392764

Contact Information

Charlotte Christiansen
Aarhus University - CREATES ( email )
Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark
Angelo Ranaldo (Contact Author)
University of St. Gallen ( email )
Swiss Institute of Banking and Finance s/bf-HSG
Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41712247010 (Phone)
HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx
University of Saint Gallen - SoF: School of Finance ( email )
Rosenbergstrasse 52
St.Gallen, CH-9000
Switzerland

Paul Söderlind
University of St. Gallen ( email )
Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)
HOME PAGE: http://home.datacomm.ch/paulsoderlind/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
University of Saint Gallen - SoF: School of Finance ( email )
Rosenbergstrasse 52
St.Gallen, CH-9000
Switzerland

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