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Carry trades and commodity risk factors

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  • Byrne, Joseph P.
  • Ibrahim, Boulis Maher
  • Sakemoto, Ryuta

Abstract

This paper investigates the importance of commodity prices for the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock.

Suggested Citation

  • Byrne, Joseph P. & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2019. "Carry trades and commodity risk factors," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 121-129.
  • Handle: RePEc:eee:jimfin:v:96:y:2019:i:c:p:121-129
    DOI: 10.1016/j.jimonfin.2019.04.004
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    Cited by:

    1. Joseph, Byrne & Sakemoto, Ryuta, 2020. "The Conditional Risk and Return Trade-Off on Currency Portfolios," MPRA Paper 99497, University Library of Munich, Germany.
    2. Qian Zhang & Kuo-Jui Wu & Ming-Lang Tseng, 2019. "Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method," Sustainability, MDPI, Open Access Journal, vol. 11(12), pages 1-26, June.

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    More about this item

    Keywords

    Currency carry trade; Commodity price; Factor model; Hierarchical model; Emerging currencies;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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