The Time-Varying Risk Price of Currency Carry Trades

Byrne, Joseph P and Ibrahim, Boulis Maher and Sakemoto, Ryuta (2017): The Time-Varying Risk Price of Currency Carry Trades.

Abstract

Recent studies show that carry trade returns are predictable and this predictability reflects changes in expected returns. Changes in expected returns may be related to time variation in betas and risk prices. We investigate this issue in carry trades and find clear evidence of time-varying risk prices for the carry factor (HMLFX). The results further indicate that time-varying risk prices are more important than time-varying betas for the carry trade asset pricing model. This suggests that investors overreact to changes in economic states.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency Carry Trades; Exchange Rate; Risk Price; Time-varying Betas; Factor Model; Nonparametric Model; FX market.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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