Carry Trades: Betting Against Safe Haven
AbstractWe 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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Bibliographic InfoPaper 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.
Length: 35 pages
Date of creation: Apr 2007
Date of revision:
Carry trades; contagion; multivariate GARCH; exceedance correlation;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
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