Dollar Carry Timing

Discussion Papers on Business and Economics, University of Southern Denmark, 10/2020

75 Pages Posted: 12 Jan 2021

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2020

Abstract

Dollar carry trade risk premiums – unlike dollar-neutral or foreign exchange carry risk premiums – are positively correlated with firm-level dispersions in investment, profitability, and book-to-market in addition to the Treasury-bill rate, long term bond yield, term spread, and default spread. Several forecasting models pin down the few periods responsible for the entire premium, based on these proxies for the latent risk and price of risk states in the U.S. (and its business cycle). This predictability is also statistically and economically significant out of sample: It generates Sharpe ratios as large as 1.37 (compared to 0.44 unconditionally), for example.

Keywords: carry trade, risk premium, business cycle, microeconomic dispersion, foreign exchange

JEL Classification: G11, G12, G15, F31, E32, D25

Suggested Citation

de Oliveira Souza, Thiago, Dollar Carry Timing (October 21, 2020). Discussion Papers on Business and Economics, University of Southern Denmark, 10/2020, Available at SSRN: https://ssrn.com/abstract=3726047 or http://dx.doi.org/10.2139/ssrn.3726047

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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