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This note examines the relationship between changes in levels of investor fear (measured by VIX) and FX market returns. Our empirical results indicate a negative relationship between daily returns on high-interest rate (investing) currencies and changes in VIX, while the association is positive...
Persistent link: https://www.econbiz.de/10013001940
We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical...
Persistent link: https://www.econbiz.de/10013006242
This paper shows that currency carry trades can be rationalized by the time-varying risk premia originating from the sovereign solvency risk. We find that solvency risk is a key determinant of risk premia in the cross section of carry trade returns, as its covariance with returns captures a...
Persistent link: https://www.econbiz.de/10012969984
Many of the leading models of the carry trade imply that, contrary to the empirical evidence, a country's currency depreciates in times of high consumption and output growth, a manifestation of the Backus and Smith (1993) puzzle. We propose a modification of these models to account for financial...
Persistent link: https://www.econbiz.de/10013022327
The failure to empirically prove uncovered interest rate parity conditions seems to be related to the presence of risk premia on foreign currencies. Recent studies suggest that either consumption- or currency-return-based pricing factors explain the cross section of foreign currency portfolio...
Persistent link: https://www.econbiz.de/10013142105
We document carry trade returns based on the moments extracted from options on the underlying currencies. We establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter...
Persistent link: https://www.econbiz.de/10012927584
We sort currencies by countries' consumption growth over the past four quarters. Currency portfolios of countries experiencing consumption booms have higher Sharpe ratios than those of countries going through a consumption-based recession. A carry strategy that goes short in countries that are...
Persistent link: https://www.econbiz.de/10009752999
There is already a substantial literature documenting the fact that low yield currencies typically appreciate during times of global financial stress and behave as safe havens. The main objective of this paper is to find out what the fundamentals of safe haven currencies are. We analyse a large...
Persistent link: https://www.econbiz.de/10008901495
What is the role of large playersʺ like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are...
Persistent link: https://www.econbiz.de/10003806083
In this paper, we study the effectiveness of carry trade strategies during and after the financial crisis using a flexible approach to modeling currency returns. We decompose the currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability...
Persistent link: https://www.econbiz.de/10011313235