Currency Carry Trades and the Conditional Factor Model

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

Date Written: February 10, 2019


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: or

Ryuta Sakemoto (Contact Author)

Hokkaido University ( email )

5 Kita 8 Jonishi, Kita Ward
Hokkaido Prefecture
Sapporo, Hokkaido 060-0808

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