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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

Sara Ferreira Filipe

Luxembourg School of Finance

Matti Suominen

Aalto University School of Business

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

Ferreira Filipe, Sara and Suominen, Matti, Currency Carry Trades and Funding Risk (June 12, 2014). AFA 2014 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=2167659 or http://dx.doi.org/10.2139/ssrn.2167659

Sara Ferreira Filipe

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg
(+352) 46 66 44 5838 (Phone)
(+352) 46 66 44 6835 (Fax)

HOME PAGE: http://www.lsf.lu/

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

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