Work

Downside Market Risk of Carry Trades

Year: 2014

Type: article

Abstract: I propose a new factor—the global downside market factor—to explain high returns to carry trades. I show that carry trades have high downside market risk, i.e. they crash systematically in the worst states of the world when the global stock market plunges or when a disaster occurs. The downside market factor explains the returns to currency portfolios sorted by the forward discount better than other factors previously proposed in the literature. GMM estimates of the downside beta premium are similar in the currency and stock markets, statistically significant and close to their theoretical value. High returns to carry trades are fair compensation for their high downside market risk.

Source: European Finance Review

DOI: 10.1093/rof/rfu004

Author: Victoria Dobrynskaya

Institutions: National Research University Higher School of Economics, The Russian Presidential Academy of National Economy and Public Administration, London School of Economics and Political Science

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: National Research University Higher School of Economics

Award: G1398165192