### Abstract

This paper explores the financial risk that trading strategies seeking to exploit a violation of the UIP condition are exposed to with respect to multivariate tail dependence present in both the funding and investment currency baskets. It will outline in what contexts these portfolio risk exposures will benefit accumulated portfolio returns and under what conditions such tail exposures will reduce portfolio returns.

Original language | English |
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Title of host publication | Innovations in Quantitative Risk Management. |

Publisher | Springer |

Pages | 163-181 |

Number of pages | 19 |

ISBN (Electronic) | 9783319091143 |

ISBN (Print) | 9783319091136 |

DOIs | |

Publication status | Published - 10 Jan 2015 |

### Publication series

Name | Springer Proceedings in Mathematics & Statistics |
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Publisher | Springer |

Volume | 99 |

ISSN (Print) | 2194-1009 |

ISSN (Electronic) | 2194-1017 |

### Fingerprint

### Cite this

*Innovations in Quantitative Risk Management.*(pp. 163-181). (Springer Proceedings in Mathematics & Statistics; Vol. 99). Springer. https://doi.org/10.1007/978-3-319-09114-3_10

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*Innovations in Quantitative Risk Management..*Springer Proceedings in Mathematics & Statistics, vol. 99, Springer, pp. 163-181. https://doi.org/10.1007/978-3-319-09114-3_10

**Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence.** / Ames, Matthew; Peters, Gareth W.; Bagnarosa, Guillaume; Kosmidis, Ioannis.

Research output: Chapter in Book/Report/Conference proceeding › Chapter

TY - CHAP

T1 - Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence

AU - Ames, Matthew

AU - Peters, Gareth W.

AU - Bagnarosa, Guillaume

AU - Kosmidis, Ioannis

PY - 2015/1/10

Y1 - 2015/1/10

N2 - Currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such strategies. That is, according to uncovered interest rate parity (UIP), changes in the related exchange rates should offset the potential to profit from such interest rate differentials. However, it has been shown empirically, that investors can earn profits on average by borrowing in a country with a lower interest rate, exchanging for foreign currency, and investing in a foreign country with a higher interest rate, whilst allowing for any losses from exchanging back to their domestic currency at maturity.This paper explores the financial risk that trading strategies seeking to exploit a violation of the UIP condition are exposed to with respect to multivariate tail dependence present in both the funding and investment currency baskets. It will outline in what contexts these portfolio risk exposures will benefit accumulated portfolio returns and under what conditions such tail exposures will reduce portfolio returns.

AB - Currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such strategies. That is, according to uncovered interest rate parity (UIP), changes in the related exchange rates should offset the potential to profit from such interest rate differentials. However, it has been shown empirically, that investors can earn profits on average by borrowing in a country with a lower interest rate, exchanging for foreign currency, and investing in a foreign country with a higher interest rate, whilst allowing for any losses from exchanging back to their domestic currency at maturity.This paper explores the financial risk that trading strategies seeking to exploit a violation of the UIP condition are exposed to with respect to multivariate tail dependence present in both the funding and investment currency baskets. It will outline in what contexts these portfolio risk exposures will benefit accumulated portfolio returns and under what conditions such tail exposures will reduce portfolio returns.

U2 - 10.1007/978-3-319-09114-3_10

DO - 10.1007/978-3-319-09114-3_10

M3 - Chapter

SN - 9783319091136

T3 - Springer Proceedings in Mathematics & Statistics

SP - 163

EP - 181

BT - Innovations in Quantitative Risk Management.

PB - Springer

ER -