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The Time-Varying Systematic Risk of Carry Trade Strategies

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  • Paul Soderlind
  • Angelo Ranaldo
  • Charlotte Christiansen

Abstract

This paper suggests a factor model for carry trade strategies where the regression coefficients are allowed to depend on market volatility and liquidity. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy has much higher exposure to the stock market and also more mean reversion in volatile periods - and that FX market volatility is a priced risk factor. The findings are robust to various extensions, including using more currencies and other proxies for volatility and liquidity (VIX, TED and a bid-ask spread).

Suggested Citation

  • Paul Soderlind & Angelo Ranaldo & Charlotte Christiansen, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," University of St. Gallen Department of Economics working paper series 2009 2009-06, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2009:2009-06
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    References listed on IDEAS

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    More about this item

    Keywords

    carry trade; factor model; smooth transition regression; time-varying betas;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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