Header

UZH-Logo

Maintenance Infos

The Time-Varying Systematic Risk of Carry Trade Strategies


Ranaldo, Angelo; Christiansen, Charlotte; Söderlind, Paul (2011). The Time-Varying Systematic Risk of Carry Trade Strategies. Journal of Financial and Quantitative Analysis, 46(4):1107-1125.

Abstract

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.

Abstract

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.

Statistics

Citations

Dimensions.ai Metrics
105 citations in Web of Science®
109 citations in Scopus®
Google Scholar™

Altmetrics

Downloads

13 downloads since deposited on 22 Aug 2023
13 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:16 May 2011
Deposited On:22 Aug 2023 10:52
Last Modified:29 Apr 2024 01:39
Publisher:Cambridge University Press
ISSN:0022-1090
OA Status:Green
Publisher DOI:https://doi.org/10.1017/S0022109011000263
Other Identification Number:merlin-id:5919
  • Content: Published Version
  • Language: English