A value-at-risk analysis of carry trades using skew-GARCH models
We carry out a value-at-risk (VaR) analysis of an extremely popular strategy in the currency markets, namely, “carry trades,” whereby a position purchased in high interest rate currencies is funded by selling low interest rate currencies. Since the natural outcome of the truncated normal distribution of interest-rate spreads combined with the normal distribution of exchange rate returns is a skew-normal distribution, we consider a skew-normal innovation with zero mean for our analysis of carry trade returns using generalized autoregressive conditional heteroskedasticity (GARCH) models. The stress testing results reveal that skew-normal or densities are suitable for the measurement of VaR for carry trade returns involving, for example, taking up a long position in Australian Dollars or Argentine Peso which are funded by selling Japanese Yen.
Year of publication: |
2013
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Authors: | Yu-Jen, Wang ; Huimin, Chung ; Jia-Hau, Guo |
Published in: |
Studies in Nonlinear Dynamics & Econometrics. - De Gruyter, ISSN 1558-3708. - Vol. 17.2013, 4, p. 439-459
|
Publisher: |
De Gruyter |
Saved in:
Online Resource
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