Currency Carry Trades and Funding Risk
EFA 2013 Cambridge Meetings
AFA 2014 Philadelphia Meetings
58 Pages Posted: 28 Oct 2012 Last revised: 13 Jun 2014
Date Written: June 12, 2014
Abstract
In this paper, we measure currency carry trade funding risk using stock market volatility and crash risk in Japan, the main funding currency country. We show that the measures of funding risk in Japan can explain 42% of the monthly currency carry trade returns during our sample period, 2000-2011. In addition, they explain 64% of the monthly foreign exchange volatility in our sample of ten main currencies, 28% of the speculators' net currency futures positions in Australian dollar versus Japanese yen, skewness in currency returns and currency crashes. We present a theoretical model that is consistent with these findings.
Keywords: carry trade, funding risk, currency crashes, exchange rates
JEL Classification: G15, G11, F31
Suggested Citation: Suggested Citation
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