The Time-Varying Systematic Risk of Carry Trade Strategies

33 Pages Posted: 26 Aug 2009

See all articles by Charlotte Christiansen

Charlotte Christiansen

Aarhus University - CREATES

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Paul Söderlind

University of St. Gallen

Multiple version iconThere are 3 versions of this paper

Date Written: June 2009

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

JEL Classification: F31, G11, G15

Suggested Citation

Christiansen, Charlotte and Ranaldo, Angelo and Söderlind, Paul, The Time-Varying Systematic Risk of Carry Trade Strategies (June 2009). CEPR Discussion Paper No. DP7345, Available at SSRN: https://ssrn.com/abstract=1461974

Charlotte Christiansen

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

Paul Söderlind (Contact Author)

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

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