Carry Funding and Safe Haven Currencies: A Threshold Regression Approach

29 Pages Posted: 21 Jun 2016

See all articles by Oliver Hossfeld

Oliver Hossfeld

Handelshochschule Leipzig (HHL)

Ronald MacDonald

University of Glasgow - Adam Smith Business School

Multiple version iconThere are 2 versions of this paper

Date Written: 2014

Abstract

In this paper, we analyze which currencies can be regarded as safe haven currencies. Our empirical approach allows us to distinguish between a low- and high stress regime, and to control for the impact of carry trade reversals and other fundamental determinants. We therefore address the question of whether a supposed safe haven currency only appreciates in times of crises because carry trades are unwound, in which the corresponding currency has served as funding currency, or whether it possesses 'true' safe haven qualities; i.e. it provides a hedge against global stock market losses in stressful times even after controlling for the impact of carry trade reversals. The latter issue has largely been brushed aside in the extant literature but has important policy implications for the justification of central bank FX interventions in times of crises. According to the estimation results, two currencies, the Swiss franc and (to a lesser extent) the US dollar qualify as safe haven currencies, and the euro serves as a hedge currency. Results for the yen support its role as a carry funding vehicle, but not necessarily that of a safe haven currency. While the focus is on effective exchange rates, the paper also contains a separate analysis of bilateral euro-based exchange rates, given the euro's prominent role during the euro area sovereign debt crisis.

Keywords: Nonlinear Regression, Threshold Model, Safe Haven, Carry Trade

JEL Classification: C32, F31

Suggested Citation

Hossfeld, Oliver and MacDonald, Ronald, Carry Funding and Safe Haven Currencies: A Threshold Regression Approach (2014). Bundesbank Discussion Paper No. 34/2014. Available at SSRN: https://ssrn.com/abstract=2797013

Oliver Hossfeld (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany

Ronald MacDonald

University of Glasgow - Adam Smith Business School ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
25
Abstract Views
291
PlumX Metrics