The paper gives evidence of a novel pricing factor for the cross-section of carry trade returns based on trade relations between countries. In particular, we apply network theory on countries' bilateral trade to construct a measure for countries' exposure to a global trade risk. A high level of...

We test the role of funding-constrained investors across developed financial markets. We compile direct measures of the severity of funding frictions, or illiquidity, from deviations of government bond yields from a fitted yield curve. Using these illiquidity measures, we first show that higher...

This paper proposes a new risk factor based on a multi-country's trading imbalance network to explain foreign exchange rate fluctuations and currency risk premia associated with a currency carry trade strategy. We build a directed in-degree trading network of global countries linked by their...

Currency carry trading presents a widespread trading strategy and refers to the forward premium puzzle. Investors borrow low-yielding currencies with the aim to invest in high-yielding ones in order to benefit from arbitrage opportunities. This implies that a one-to-one relationship does not...

We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries...

Separate literatures study violations of uncovered interest parity using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate...

Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional...

We investigate whether structurally hedging the currency risk of global equity products benefits long-term investors. Based on a 35 year back-test of 3 smart beta strategies from 6 currency perspectives, our answer is a qualified “yes”. Currency hedging was effective in reducing risk and...

We examine 24 global factor premiums across the main asset classes via replication and new-sample evidence spanning 217 years of data. Replication yields ambiguous evidence within a unified testing framework with methods that account for p-hacking. The new-sample evidence reveals that the large...