Common information in carry trade risk factors

Joseph P. Byrne; Boulis Maher Ibrahim; Ryuta Sakemoto

doi:10.1016/j.intfin.2017.11.003

Common information in carry trade risk factors

Joseph P. Byrne^*, Boulis Maher Ibrahim, Ryuta Sakemoto

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

10 Citations (Scopus)

10 Downloads (Pure)

Abstract

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 characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.

Original language	English
Pages (from-to)	37-47
Number of pages	11
Journal	Journal of International Financial Markets, Institutions and Money
Volume	52
Early online date	27 Nov 2017
DOIs	https://doi.org/10.1016/j.intfin.2017.11.003
Publication status	Published - 31 Jan 2018

Keywords

currency carry trade
Fama-MacBeth
principal components
risk factor

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10.1016/j.intfin.2017.11.003

Byrne-etal-JIFMIM-2017-Common-information-in-carry-trade-risk-factorsAccepted author manuscript, 186 KBLicence: CC BY-NC-ND 4.0

https://mpra.ub.uni-muenchen.de/75367/

Cite this

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abstract = "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 characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.",

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AU - Ibrahim, Boulis Maher

AU - Sakemoto, Ryuta

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AB - 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 characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk.

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KW - Fama-MacBeth

KW - principal components

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ER -

Common information in carry trade risk factors

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Keywords

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