Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information

35 Pages Posted: 14 Sep 2011

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Angelica Gonzalez

University of Edinburgh

Olga Klinkowska

University of Aberdeen - Business School

Date Written: September 14, 2011

Abstract

We use a standard consumption-based asset pricing model incorporating conditioning information to explain the risk-return profile of currency carry trade portfolios. We use a scaled stochastic discount factor instead of scaled or managed portfolio returns as in previous work. Our conditioning variable is a forward-looking measure of net foreign assets. It arises from an intertemporal budget constraint and has predictive power for exchange rates. We find that our conditional consumption-CAPM is able to price a large part of the variation in cross-section of carry trade portfolios using cross-sectional as well as time series regression-based tests. Taken together, our results imply that the consumption-based models do still have a role to play in explaining excess returns on carry trade strategies.

Keywords: Consumption CAPM, Fama-MacBeth Regressions, Net Foreign Assets, Conditioning Information, Conditional Asset Pricing Models

JEL Classification: G0, G10, G12

Suggested Citation

Abhyankar, Abhay and Gonzalez, Angelica and Klinkowska, Olga, Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information (September 14, 2011). Available at SSRN: https://ssrn.com/abstract=1927265 or http://dx.doi.org/10.2139/ssrn.1927265

Abhay Abhyankar (Contact Author)

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Angelica Gonzalez

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Olga Klinkowska

University of Aberdeen - Business School ( email )

Edward Wright Building
Aberdeen, Aberdeenshire AB24 3QY
United Kingdom

HOME PAGE: http://www.abdn.ac.uk/~bus067/

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