Currency carry trade regimes: Beyond the Fama regression
AbstractWe show that carry trade strategies resemble FX option strategies that sell out of the money puts on high interest rate currencies. Both strategies collect premiums to generate persistent excess returns that unwind sharply when volatility increases. We also show that the widely documented negative slope coefficient in regressions of exchange rate depreciation on forward currency premiums is an artifact of the volatility regime. In high volatility regimes, the so-called Fama regression produces a positive coefficient greater than unity. We finally document the existence of an intuitive co-movement between currency risk premiums and yield curve risk factors.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 28 (2009)
Issue (Month): 8 (December)
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Web page: http://www.elsevier.com/locate/inca/30443
Currency carry trade Risk premium Fama Yield curve risk premia;
Other versions of this item:
- Richard Clarida & Josh Davis & Niels Pedersen, 2009. "Currency Carry Trade Regimes: Beyond the Fama Regression," NBER Working Papers 15523, National Bureau of Economic Research, Inc.
- F3 - International Economics - - International Finance
- F31 - International Economics - - International Finance - - - Foreign Exchange
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