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Currency carry trades and the conditional factor model

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  • Sakemoto, Ryuta

Abstract

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.

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  • Sakemoto, Ryuta, 2019. "Currency carry trades and the conditional factor model," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 198-208.
    • Handle: RePEc:eee:finana:v:63:y:2019:i:c:p:198-208
    DOI: 10.1016/j.irfa.2019.03.007
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    More about this item

    Keywords

    Currency carry trades; Conditional factor model; Nonparametric estimator; Time-varying beta;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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