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The Time-Varying Systematic Risk of Carry Trade Strategies

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  • Paul Soderlind

    ()

  • Angelo Ranaldo

    ()

  • Charlotte Christiansen

    ()

Abstract

This paper suggests a factor model for carry trade strategies where the regression coefficients are allowed to depend on market volatility and liquidity. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy has much higher exposure to the stock market and also more mean reversion in volatile periods - and that FX market volatility is a priced risk factor. The findings are robust to various extensions, including using more currencies and other proxies for volatility and liquidity (VIX, TED and a bid-ask spread).

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2009/DP-0906-So.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2009 with number 2009-06.

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Length: 27 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:usg:dp2009:2009-06

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Related research

Keywords: carry trade; factor model; smooth transition regression; time-varying betas;

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References

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