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Carry trades and risk factors heterogeneity: Three asymmetries

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  • Sun, Yike
  • Wu, Yimin

Abstract

We show heterogeneity in risk factors for carry trade risk premia across country groups by decomposing global foreign exchange (FX) volatility innovations into geopolitical risk (GPR), economic policy uncertainty (EPU), and a residual FX market risk factor. Using monthly data for 40 economies (1999M1–2024M6), we orthogonalize innovations and estimate prices using a two-step Fama–MacBeth procedure. Three asymmetries emerge: GPR premia are positive but smaller in advanced economies (AEs) than in emerging and developing economies (EMDEs); EPU premia are positive in AEs and smaller, often negative, in EMDEs; the residual FX factor is priced negatively in AEs and positively in EMDEs.

Suggested Citation

  • Sun, Yike & Wu, Yimin, 2026. "Carry trades and risk factors heterogeneity: Three asymmetries," Economics Letters, Elsevier, vol. 259(C).
    • Handle: RePEc:eee:ecolet:v:259:y:2026:i:c:s0165176525006159
    DOI: 10.1016/j.econlet.2025.112778
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    References listed on IDEAS

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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