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Currency carry trade: The decline in performance after the 2008 Global Financial Crisis

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Listed:
  • Fan, Zhenzhen
  • Paseka, Alexander
  • Qi, Zhen
  • Zhang, Qi

Abstract

This paper investigates the decline in performance of the carry strategy after the Global Financial Crisis (GFC) from a risk-based asset pricing perspective. We put forward and test four hypothesis that attribute the performance deterioration to under-diversification, a decline in systematic risk, downside risk, or crash risk, respectively. Overall, we attribute the decline in carry performance can be largely attributed to the disappearance of the downside risk in the post-crisis carry trade portfolio, rather than under-diversification, changing exposure to known risk factors, or decreased crash risks in currencies.

Suggested Citation

  • Fan, Zhenzhen & Paseka, Alexander & Qi, Zhen & Zhang, Qi, 2022. "Currency carry trade: The decline in performance after the 2008 Global Financial Crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:intfin:v:76:y:2022:i:c:s1042443121001670
    DOI: 10.1016/j.intfin.2021.101460
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    More about this item

    Keywords

    Efficient carry; Currency anomalies; Global Financial Crisis; Crash risk; Option hedging;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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