Carry Trade Fundamentals And The Financial Crisis 2007-2010
This paper takes the form of an event study surrounding the current financial crisis. It proposes a theoretical relationship which can be used to model traditional carry trade crosses on a daily return basis as a negative function of equity returns and a positive function of market volatility. In order to test this theory, an Arbitrage Pricing Theory framework is adopted which is used to estimate the factor betas of carry trade crosses with respect to equity returns and market volatility. It is shown how the variation in the currency crosses explained by the functional relationship as well as the estimated factor betas have increased significantly in relation to the financial crisis. The results indicate that low yielding currencies (the JPY and CHF) can be successfully modelled as a negative function of equity returns and a positive function of volatility in the market. The results furthermore underpin studies that have shown how carry trading activity is highly sensitive towards sudden sparks of volatility and risk aversion, and thus how carry trade fundamentals are time varying.
Volume (Year): 4 (2009)
Issue (Month): 2(8)_ Summer 2009 ()
|Contact details of provider:|| Web page: http://www2.spiruharet.ro/facultati/facultate.php?id=14|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009.
"Carry Trades and Currency Crashes,"
in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347
National Bureau of Economic Research, Inc.
- Emmanuel Farhi & Xavier Gabaix, "undated".
"Rare Disasters and Exchange Rates,"
71001, Harvard University OpenScholar.
- Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc.
- Farhi, Emmanuel & Gabaix, Xavier, 2015. "Rare Disasters and Exchange Rates," CEPR Discussion Papers 10334, C.E.P.R. Discussion Papers.
- Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers 47, Society for Economic Dynamics.
- Christiansen, Charlotte & Ranaldo, Angelo & Söderlind, Paul, 2009.
"The Time-Varying Systematic Risk of Carry Trade Strategies,"
CEPR Discussion Papers
7345, C.E.P.R. Discussion Papers.
- Christiansen, Charlotte & Ranaldo, Angelo & Söderlind, Paul, 2011. "The Time-Varying Systematic Risk of Carry Trade Strategies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(04), pages 1107-1125, September.
- Paul Soderlind & Angelo Ranaldo & Charlotte Christiansen, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," University of St. Gallen Department of Economics working paper series 2009 2009-06, Department of Economics, University of St. Gallen.
- Charlotte Christiansen & Angelo Ranaldo & Paul Söderlind, 2010. "The Time-Varying Systematic Risk of Carry Trade Strategies," Working Papers 2010-01, Swiss National Bank.
- Charlotte Christiansen & Angelo Ranaldo & Paul Söderllind, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," CREATES Research Papers 2009-15, Department of Economics and Business Economics, Aarhus University.
- Alexander, Gordon J. & Chervany, Norman L., 1980. "On the Estimation and Stability of Beta," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 123-137, March.
- Bilson, John F O, 1981.
"The "Speculative Efficiency" Hypothesis,"
The Journal of Business,
University of Chicago Press, vol. 54(3), pages 435-451, July.
- Marie Briere & Bastien Drut, 2009. "The Revenge of Purchasing Power Parity on Carry Trades during Crises," Working Papers CEB 09-013.RS, ULB -- Universite Libre de Bruxelles.
- Aidan Corcoran, 2009. "The Determinants of Carry Trade Risk Premia," The Institute for International Integration Studies Discussion Paper Series iiisdp287, IIIS.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
- Harald Hau & Helene Rey, 2002.
"Exchange Rate, Equity Prices and Capital Flows,"
NBER Working Papers
9398, National Bureau of Economic Research, Inc.
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
- repec:dau:papers:123456789/7743 is not listed on IDEAS
- Daniel Kohler, 2007. "Carry Trades: Betting Against Safe Haven," University of St. Gallen Department of Economics working paper series 2007 2007-12, Department of Economics, University of St. Gallen.
- Joseph E. Gagnon & Alain P. Chaboud, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers 899, Board of Governors of the Federal Reserve System (U.S.).
- Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
- De Santis, Roberto A. & Sarno, Lucio, 2008. "Assessing the benefits of international portfolio diversification in bonds and stocks," Working Paper Series 0883, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:ush:jaessh:v:4:y:2009:i:2(8)_summer2009:68. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laura Stefanescu)
If references are entirely missing, you can add them using this form.