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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | The Time-Varying Systematic Risk of Carry Trade Strategies |
| Organization Unit | |
| Authors |
|
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Journal of Financial and Quantitative Analysis |
| Publisher | Cambridge University Press |
| Geographical Reach | international |
| ISSN | 0022-1090 |
| Volume | 46 |
| Number | 4 |
| Page Range | 1107 - 1125 |
| Date | 2011 |
| Abstract Text | We explain the currency carry trade (CT) performance using an asset pricing model in which factor loadings are regime dependent rather than constant. Empirical results show that a typical CT strategy has much higher exposure to the stock market and is mean reverting in regimes of high foreign exchange volatility. The findings are robust to various extensions. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the CT performance is better explained by a time-varying systematic risk that increases in volatile markets, suggesting a partial resolution of the uncovered interest parity puzzle. |
| Digital Object Identifier | 10.1017/S0022109011000263 |
| Other Identification Number | merlin-id:5919 |
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