Carry Trades and Commodity Risk Factors

47 Pages Posted: 5 Jun 2019

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

Okayama University; Keio University

Date Written: March 2, 2019

Abstract

This paper investigates the importance of commodity prices for the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock.

Keywords: Currency Carry Trade, Commodity price, Factor Model, Hierarchical Model, Emerging Currencies

JEL Classification: C58, F31, G12, G15

Suggested Citation

Byrne, Joseph and Ibrahim, Boulis Maher and Sakemoto, Ryuta, Carry Trades and Commodity Risk Factors (March 2, 2019). Available at SSRN: https://ssrn.com/abstract=3389754 or http://dx.doi.org/10.2139/ssrn.3389754

Joseph Byrne

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 (Contact Author)

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan

Keio University ( email )

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

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