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...

Standard asset pricing models have difficulty explaining cross-sectional differences in observed equity risk premia of developed and emerging markets. We argue that national equity returns are subject to sample selectivity and peso biases. The lack of credible commitment to keep capital markets...

The advent of the single currency within the European Union provides a natural experiment to measure how the cost of equity changes as globalization takes place. This is because the launch of the single currency has led to the elimination of currency-related restrictions on the composition of...

We examine the extent to which the profitability of the HML, SMB, and WML trading strategies can be linked to future GDP growth. Using a large cross-section of securities from ten developed markets, we find that the HML and SMB portfolios contain significant information about future GDP growth....

We study the investment behaviour of foreign investors in association with an equity market liberalization, and find a strong link between foreigners' trading and local market returns. In the period following the liberalization, foreigners' net purchases led to a permanent increase in prices, or...

Any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the...

We propose regression based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The...

International financial integration has greatly increased the scope for changes in a country’s net foreign asset position through the “valuation channel” of external adjustment, namely capital gains and losses on the country’s external assets and liabilities. We examine this valuation...

In the finance literature, cross-sectional dependence in extreme returns of risky assets is often modelled implicitly assuming an asymptotically dependent structure. If the true dependence structure is asymptotically independent then existing finance models will lead to over-estimation of the...

This paper presents new stylized facts on the distribution of the home bias at the fund level. We find (i) a large heterogeneity in the degree of home bias across mutual funds; (ii) a positive correlation between the size of funds and home bias; and (iii) a positive correlation between the size...