Common Information in Carry Trade Risk Factors

Joseph Paul Byrne; Boulis Maher Ibrahim; Ryuta Sakemoto

doi:10.1016/j.intfin.2017.11.003

Common Information in Carry Trade Risk Factors

Joseph Paul Byrne, Boulis Maher Ibrahim, Ryuta Sakemoto

School of Social Sciences

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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.

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 - Jan 2018

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© 2017 Elsevier B.V.
Accepted author manuscript, 428 KBLicence: CC BY-NC-ND

Boulis Maher Ibrahim
- B.M.Ibrahimhw.acuk
- School of Social Sciences, Edinburgh Business School - Associate Professor
- School of Social Sciences - Associate Professor
Person: Academic (Research & Teaching)

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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.",

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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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Common Information in Carry Trade Risk Factors

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