Carry Trades and Commodity Risk Factors

Byrne, Joseph P and Ibrahim, Boulis Maher and Sakemoto, Ryuta (2017): Carry Trades and Commodity Risk Factors.

Abstract

This paper investigates the importance of commodity prices to 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency Carry Trade; Commodity price; Factor Model; Hierarchical Model; Emerging Currencies
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; 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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