Global Equity Correlation in FX Carry and Momentum Trades

76 Pages Posted: 11 Nov 2014 Last revised: 30 Sep 2017

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Redouane Elkamhi

University of Toronto - Rotman School of Management

Date Written: Septermber 21, 2017

Abstract

In this paper, we theoretically motivate why the global equity correlation is a viable factor for the FX carry and momentum strategies. We construct a measure of our factor and find that it has a robust negative price of risk. The negative price of risk suggests that investors demand low risk premium for the portfolios whose returns co-move with the correlation innovation since they provide hedging opportunity against unexpected changes in the global investor's risk aversion. Consistent with our model prediction, we also extend our analysis to the cross-section of global equities, commodities, sovereign bonds, and options and find that asset pricing models augmented with our correlation innovation factor significantly improve the joint cross-sectional fits across various asset classes.

Keywords: Exchange Rates, Dynamic Conditional Correlation, Carry Trades, Momentum Trades, Predictability, Consumption Risk

JEL Classification: F31, G12, G15

Suggested Citation

Bae, Joon Woo and Elkamhi, Redouane, Global Equity Correlation in FX Carry and Momentum Trades (Septermber 21, 2017). Available at SSRN: https://ssrn.com/abstract=2521608 or http://dx.doi.org/10.2139/ssrn.2521608

Joon Woo Bae (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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