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Carry Trades: Betting Against Safe Haven

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Author Info
Daniel Kohler ()
Abstract

We examine contagion and flight-to-quality phenomena implied by carry strategies. More specifically, we analyze correlation dynamics between returns on a global equity index and returns on an investment strategy with a long position in high-yield and a short position in low-yield markets. Modeling information spillovers in a multivariate GARCH framework reveals that correlation increases considerably in response to a negative stock market shock. Moreover, a test for symmetry in exceedance correlation shows that correlation is indeed significantly larger for joint market downturns as opposed to joint market upturns. Our findings suggest that conditional correlation exposes carry traders to a severe diversification meltdown in times of global stock market crises.

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File URL: http://www.vwa.unisg.ch/RePEc/usg/dp2007/DP-12-Ko.pdf
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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2007 with number 2007-12.

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Length: 35 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:usg:dp2007:2007-12

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Related research
Keywords: Carry trades; contagion; multivariate GARCH; exceedance correlation;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 817-44.
  2. Kugler, Peter & Weder di Mauro, Beatrice, 2004. "International Portfolio Holdings and Swiss Franc Asset Returns," CEPR Discussion Papers 4467, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Hanno Lustig & Adrien Verdelhan, 2004. "The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk," 2004 Meeting Papers 136c, Society for Economic Dynamics. [Downloadable!]
  4. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04. [Downloadable!] (restricted)
  5. Sergei Sarkissian, 2003. "Incomplete Consumption Risk Sharing and Currency Risk Premiums," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(3), pages 983-1005, July. [Downloadable!] (restricted)
  6. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March. [Downloadable!]
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  7. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Blackwell Publishing, vol. 17(4), pages 571-608, 09. [Downloadable!] (restricted)
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  8. David Michayluk & Patrick J. Wilson & Ralf Zurbruegg, 2006. "Asymmetric Volatility, Correlation and Returns Dynamics Between the U.S. and U.K. Securitized Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(1), pages 109-131, 03. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vistesen, Claus, 2009. "Carry Trade Fundamentals and the Financial Crisis 2007-2010," MPRA Paper 9952, University Library of Munich, Germany. [Downloadable!]
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  2. Marie Brière & Bastien Drut, 2009. "The Revenge of Purchasing Power Parity on Carry Trades during Crises," Working Papers CEB 09-013.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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