Currency carry trades and the conditional factor model

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2 Citations (Scopus)

Abstract

This study employs a conditional factor model in order to investigate the time-varying profitability of currency carry trades. To that end, I estimate conditional alphas and betas on the popular dollar and carry factors through the use of a nonparametric approach. The empirical results illustrate that the alphas and betas vary over time. Furthermore, I find that the alpha of a high interest rate currency portfolio increases in a trough in a business cycle and in a state of high market uncertainty. However, the beta on the dollar factor decreases in these market conditions, suggesting that investors reduce the foreign currency risk exposure.

Original languageEnglish
Pages (from-to)198-208
Number of pages11
JournalInternational Review of Financial Analysis
Volume63
DOIs
Publication statusPublished - May 2019
Externally publishedYes

Keywords

  • Conditional factor model
  • Currency carry trades
  • Nonparametric estimator
  • Time-varying beta

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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