Common Information in Carry Trade Risk Factors

32 Pages Posted: 2 Dec 2016

See all articles by Joseph Byrne

Joseph Byrne

Heriot-Watt University - Department of Accountancy, Economics and Finance

Boulis Maher Ibrahim

Heriot Watt University

Ryuta Sakemoto

Keio University; YJFX,Inc

Date Written: October 14, 2016

Abstract

Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.

Keywords: Currency Carry Trade, Risk Factor, Principal Components, Fama-MacBeth

JEL Classification: C38, F31, G12, G15

Suggested Citation

Byrne, Joseph and Ibrahim, Boulis Maher and Sakemoto, Ryuta, Common Information in Carry Trade Risk Factors (October 14, 2016). Available at SSRN: https://ssrn.com/abstract=2878748 or http://dx.doi.org/10.2139/ssrn.2878748

Joseph Byrne (Contact Author)

Heriot-Watt University - Department of Accountancy, Economics and Finance ( email )

Scotland
United Kingdom

Boulis Maher Ibrahim

Heriot Watt University ( email )

Accountancy, Economics and Finance Department
Riccarton
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://www.hw.ac.uk

Ryuta Sakemoto

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

YJFX,Inc ( email )

Kioi Tower 23F, Tokyo Garden Terrace Kioicho
1-3 Kioicho, Chiyoda-ku
Tokyo
Japan

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