Common information in carry trade risk factors

Joseph P. Byrne, Boulis Maher Ibrahim, Ryuta Sakemoto

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.

Original languageEnglish
Pages (from-to)37-47
Number of pages11
JournalJournal of International Financial Markets, Institutions and Money
Volume52
DOIs
Publication statusPublished - Jan 2018

Keywords

  • Currency carry trade
  • Fama-MacBeth
  • Principal components
  • Risk factor

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Common information in carry trade risk factors'. Together they form a unique fingerprint.

Cite this