Common Information in Carry Trade Risk Factors

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)37-47
Number of pages11
JournalJournal of International Financial Markets, Institutions and Money
Volume52
Early online date27 Nov 2017
DOIs
Publication statusPublished - Jan 2018

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Common factors
Carry trade
Market risk
Stock market
Risk factors
Factors
Exchange rate volatility
Pricing errors
Empirical evidence
Excess returns
Innovation

Cite this

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title = "Common Information in Carry Trade Risk Factors",
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.",
author = "Byrne, {Joseph Paul} and Ibrahim, {Boulis Maher} and Ryuta Sakemoto",
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Common Information in Carry Trade Risk Factors. / Byrne, Joseph Paul; Ibrahim, Boulis Maher; Sakemoto, Ryuta.

In: Journal of International Financial Markets, Institutions and Money, Vol. 52, 01.2018, p. 37-47.

Research output: Contribution to journalArticle

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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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