IDEAS home Printed from https://ideas.repec.org/a/ibf/ijbfre/v10y2016i3p11-28.html
   My bibliography  Save this article

Carry Trade Strategies With Factor Augmented Macro Fundamentals: A Dynamic Markov-Switching Factor Model

Author

Listed:
  • Gokcen Ogruk

Abstract

This paper evaluates the performance of carry trade strategies with macro fundamentals in a Markov switching dynamic factor augmented regression framework and compares the performance statistics with the benchmark model of a random walk and momentum strategy. I make simulations with the Japanese Yen, Swiss Franc and US Dollar as funding currencies against six target currencies. Carry trade, a currency speculation strategy between the high-interest rate and low-interest rate currencies, generates high payoffs on average but has a possibility of crash risk. I argue that risk adjusted returns, mean returns and downside risk perform better when purchasing power parity model is used in a both regime switching and linear factor augmented regression framework for Franc trades and perform as good as benchmark model of momentum strategy for Dollar and Yen trades

Suggested Citation

  • Gokcen Ogruk, 2016. "Carry Trade Strategies With Factor Augmented Macro Fundamentals: A Dynamic Markov-Switching Factor Model," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 10(3), pages 11-28.
    • Handle: RePEc:ibf:ijbfre:v:10:y:2016:i:3:p:11-28
    as

    Download full text from publisher

    File URL: http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v10n3-2016/IJBFR-V10N3-2016-2.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Exchange Rate Models; Carry Trade; Forecasting; Markov-Switching Dynamic Factor;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibf:ijbfre:v:10:y:2016:i:3:p:11-28. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mercedes Jalbert (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.