Currency Carry Trades and the Conditional Factor Model

53 Pages Posted: 30 Jul 2018 Last revised: 29 Mar 2019

Date Written: February 10, 2019

Abstract

This study employs a conditional factor model in order to investigate the time-varying profitability of currency carry trades. To that end, I estimate conditional alphas and betas on the popular dollar and carry factors through the use of a nonparametric approach. The empirical results illustrate that the alphas and betas vary over time. Furthermore, I find that the alpha of a high interest rate currency portfolio increases in a trough in a business cycle and in a state of high market uncertainty. However, the beta on the dollar factor decreases in these market conditions, suggesting that investors reduce the foreign currency risk exposure.

Keywords: Currency Carry Trades, Conditional Factor Model, Nonparametric Estimator, Time-Varying Beta

JEL Classification: C14, C58, F31

Suggested Citation

Sakemoto, Ryuta, Currency Carry Trades and the Conditional Factor Model (February 10, 2019). Available at SSRN: https://ssrn.com/abstract=3210768 or http://dx.doi.org/10.2139/ssrn.3210768

Ryuta Sakemoto (Contact Author)

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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