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The Term Structure Of Currency Carry Trade Risk Premia
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Book Synopsis The Term Structure of Currency Carry Trade Risk Premia by : Hanno Lustig
Download or read book The Term Structure of Currency Carry Trade Risk Premia written by Hanno Lustig and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We find that average returns to currency carry trades decrease significantly as the maturity of the foreign bonds increases, because investment currencies tend to have small local bond term premia. The downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets. We show that long-maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels, since transitory currency risk is automatically hedged by interest rate risk for long-maturity bonds. Our findings imply that there is more cross-border sharing of permanent than transitory shocks.
Book Synopsis The Term Structure of Currency Carry Trade Risk Premia by : Hanno N. Lustig
Download or read book The Term Structure of Currency Carry Trade Risk Premia written by Hanno N. Lustig and published by . This book was released on 2018 with total page 113 pages. Available in PDF, EPUB and Kindle. Book excerpt: Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases, because the local currency term premia offset the currency risk premia. The time series predictability of foreign bond returns in dollars similarly declines with the bonds' maturities. Leading no-arbitrage models in international finance cannot match the downward term structure of currency carry trade risk premia. To match these findings, we find that long-run U.I.P. has to hold on average in dynamic no-arbitrage asset pricing models.
Book Synopsis Identification and Testing of a Term Structure Relationship for Country and Currency Risk Premia in an Emerging Market by : Ian Domowitz
Download or read book Identification and Testing of a Term Structure Relationship for Country and Currency Risk Premia in an Emerging Market written by Ian Domowitz and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses a term structure of Mexican sovereign debt to create measures of country and currency risk premia. We use these measures to test hypothesis about investors' expectations regarding these risks and their relationship to volatility in securities markets. In the period 1993-94, the behavior of these two risk premia are markedly different. Interestingly, the currency premium is considerably larger and more volatile than its country risk counterpart. We find that increases in stock return volatility translate into increases in the premium demanded by investors with respect to currency and country factors. Investors appear to have long memories, in that the premia are more persistent than equity market volatility shocks.
Book Synopsis Currency Carry Trades, Position-Unwinding Risk, and Sovereign Credit Premia by : Huichou Huang
Download or read book Currency Carry Trades, Position-Unwinding Risk, and Sovereign Credit Premia written by Huichou Huang and published by . This book was released on 2016 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we derive the measure of position-unwinding risk of currency carry trade portfolios from the currency option pricing model. The position-unwinding likelihood indicator is in nature driven by interest rate differential and currency volatility, and highly correlated with global currency skewness risk. We show that high interest-rate currencies are exposed to higher position-unwinding risk than low interest-rate currencies. We then provide a framework that decomposes carry trade payoffs into sovereign credit premium, interest rate differential, and expected exchange rate depreciation (overshooting) upon default components to analyze currency risk premia. We investigate the sovereign CDS spreads as the proxy for solvency of a state and find that high interest-rate currencies load up positively on sovereign default risk while low interest-rate currencies provide a hedge against it. Sovereign credit premia, as the dominant (country-specific) fundamental risk that drives market volatility (global contagion channel), together with position-unwinding likelihood indicator as the market risk sentiment, captures over 90% of cross-sectional variations of carry trade excess returns. In this context, the forward premium puzzle can be understood as a composite story of sovereign credit premia, global liquidity imbalances and reversal. We further reveal that sovereign default risk also explains large proportions of the cross sections of currency momentum (over 65%) and volatility risk premium (over 80%) portfolios.
Book Synopsis Solvency Risk Premia and the Carry Trades by : Vitaly Orlov
Download or read book Solvency Risk Premia and the Carry Trades written by Vitaly Orlov and published by . This book was released on 2017 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows that currency carry trades can be rationalized by the time-varying risk premia originating from the sovereign solvency risk. We find that solvency risk is a key determinant of risk premia in the cross section of carry trade returns, as its covariance with returns captures a substantial part of the cross-sectional variation of carry trade returns. Importantly, low interest rate currencies serve as insurance against solvency risk, while high interest rate currencies expose investors to more risk. The results are not attenuated by existing risks and pass a broad range of various robustness checks.
Book Synopsis The Term Structure of Exchange Rate Predictability by : Huichou Huang
Download or read book The Term Structure of Exchange Rate Predictability written by Huichou Huang and published by . This book was released on 2016 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study the exchange rate predictability across a range of investment horizons by return decomposition into forward premium component and carry trade risk premium component, for which we propose a term structure model to capture exchange rate dynamics with a broad set of predictors meanwhile handle both parameter and model uncertainties. We demonstrate the time-varying term-structural and model disagreement effects of exchange rate determinants as well as the projections of predictive information over the term structure. We also utilize the time-variation in the probability weighting from dynamic model averaging to identify the scapegoat drivers of customer order flows, which are also informative about the term structure of carry trade risk premia. Our findings reveal that heterogeneous agents learn to forecast exchange rates and switch trading rules over time, resulting in the dynamic country-specific and global exposures of exchange rates to short-run non-fundamental risk and long-run business cycle risk. Hedging pressure and liquidity are identified to contain predictive information that is common to a range of forecasting horizons. Policy-related predictors are important for short-run forecasts up to 3 months while crash risk indicators matter for long-run forecasts from 9 months to 12 months. We further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees of 6.5% per annum.
Book Synopsis Risk-premia, Carry-trade Dynamics, and Speculative Efficiency of Currency Markets by : Dr. Christian Wagner
Download or read book Risk-premia, Carry-trade Dynamics, and Speculative Efficiency of Currency Markets written by Dr. Christian Wagner and published by . This book was released on 2008 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Determinants of Carry Trade Risk Premia by : Aidan Corcoran
Download or read book The Determinants of Carry Trade Risk Premia written by Aidan Corcoran and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis U.S. Dollar Currency Premium in Corporate Bonds by : John Caramichael
Download or read book U.S. Dollar Currency Premium in Corporate Bonds written by John Caramichael and published by International Monetary Fund. This book was released on 2021-07-12 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We isolate a U.S. dollar currency premium by comparing corporate bonds issued in the dollar and the euro by firms o utside t he U .S. a nd e uro a rea. We make s everal empirical observations that dissect the perceived advantage of borrowing in the dollar. First, while the dollar dominates global debt issuance, borrowing costs in the dollar are more expensive without a currency hedge and about the same with a currency hedge when compared to the euro. This observed parity in currency-hedged corporate borrowing stands in contrast to the persistent deviation from covered interest parity in risk-free rates. Second, we observe a dollar safety premium in relative hedged borrowing costs, found in the subset of bonds with high credit ratings and short maturities, attributes similar to those of safe sovereigns. Finally, we find that firms flexibly adjust the currency mix of their debt issuance depending on the relative borrowing cost between dollar and euro debt. In sum, the disproportionate demand for U.S. dollar debt is reflected in higher issuance volumes that drive up the currency hedged dollar borrowing costs such that at the margin they equate to euro borrowing costs.
Book Synopsis Essays on Currency Risks and Returns by : Jingyi Ren
Download or read book Essays on Currency Risks and Returns written by Jingyi Ren and published by . This book was released on 2019 with total page 175 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 11 proposes using foreign exchange rate currency options with different strike prices and maturities to capture both currency risks and expectations, for helping understand currency return dynamics. We show that currency returns, which are notoriously difficult to model empirically, are well-explained by the term structures of forward premia and options-based measures of FX expectations and risk. Although this finding is to be expected, expectations and risk have been largely ignored in empirical exchange-rate modeling. Using daily options data for six major currency pairs, we first show that currency options-implied standard deviation, skewness, and kurtosis consistently improve the explanatory power of quarterly currency returns than a standardized UIP regression. We then show that adding term structure information of options-implied moments further improves the explanatory power. Our results highlight the importance of expectations and risk in explaining currency returns and suggest that this information may be particularly useful during a crisis period. Chapter 2 studies the term structure of currency risk using FX options data, and finds it able to explain the cross-sectional variation of currency excess returns. With the tool of a new FX risk index, "FCX", I look into currency risk term structure and measure its shape by level and slope. I consistently find that for currencies paired by US dollars, the term structure of currency risk is flat at a low level prior to the 2008 crisis, upward-sloping after the crisis and peaks at a high level with a prominently negative slope during the crisis. This work is believed to be new in the currency research field. I then use this information to build trading strategies, earning a profit by longing currencies with the highest level or slope and shorting ones with the lowest level or slope. The profit by sorting slope is significantly high and robust to the 2008 crisis period, with a low correlation to the Carry Trade return, suggesting extra information in risk than the interest rate. Next, I extract global risk factors by level and slope to help understand the currency excess return, a long-lasting puzzle. The global risk factor by level substantially improves the cross-sectional explanatory power in currency excess returns compared to Lustig et al. (2011). Furthermore, I show that there is certain high risk corresponding to a high level and low slope, and high interest rate currency earns returns co-varying negatively to this risk, implying that it is a risky asset and thus requires a high risk premium, which explains the Carry Trade return well. Chapter 32 explores the possible macroeconomic connection in currency markets through the channel of FX risk term structure. There is a consensus in the literature that exchange rates are empirically “disconnected” from fundamentals, but a possible theoretical insight is that macroeconomic volatility shocks induce time-varying risks in the exchange rates. This chapter empirically investigates the connection between macroeconomic fundamentals and time-varying currency risks captured by the FX risk term structure, following the main findings of chapters 1 and 2. This chapter use both a small dataset of directly observable, country-specific key macroeconomic and international variables implied by exchange rate structural modeling and a small number of macroeconomic factors constructed from a large dataset of 126 U.S. macroeconomic series by principal component analysis. We perform a VAR analysis to examine impulse responses of FX risk term structure to the shocks of macroeconomic events and find that production variables can generate a relatively consistent and systematic impact pattern, which suggests potential macroeconomic connection. We also perform a direct single regression, regressing the 126 macroeconomic series of eight different groups on the FX risk term structure and apply the group LASSO technique for variable selection. Variables among both macroeconomic fundamentals and financial series are commonly selected, which suggests that financial markets’ co-movements also exist besides potential macroeconomic connection.
Book Synopsis Innovations in Quantitative Risk Management by : Kathrin Glau
Download or read book Innovations in Quantitative Risk Management written by Kathrin Glau and published by Springer. This book was released on 2015-01-09 with total page 434 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantitative models are omnipresent –but often controversially discussed– in todays risk management practice. New regulations, innovative financial products, and advances in valuation techniques provide a continuous flow of challenging problems for financial engineers and risk managers alike. Designing a sound stochastic model requires finding a careful balance between parsimonious model assumptions, mathematical viability, and interpretability of the output. Moreover, data requirements and the end-user training are to be considered as well. The KPMG Center of Excellence in Risk Management conference Risk Management Reloaded and this proceedings volume contribute to bridging the gap between academia –providing methodological advances– and practice –having a firm understanding of the economic conditions in which a given model is used. Discussed fields of application range from asset management, credit risk, and energy to risk management issues in insurance. Methodologically, dependence modeling, multiple-curve interest rate-models, and model risk are addressed. Finally, regulatory developments and possible limits of mathematical modeling are discussed.
Book Synopsis The Tail Risk Premia of the Carry Trades by : Philippe Dupuy
Download or read book The Tail Risk Premia of the Carry Trades written by Philippe Dupuy and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the relationship between the excess returns of portfolios invested in carry trade positions and a set of candidate risk factors including an innovative tail risk factor. We find that high interest rate currencies are related to innovations in global currency tail risk. They deliver low returns in time of unexpected high tail risk and high returns in time of unexpected low tail risk suggesting a standard Asset Pricing Theory approach to explaining the returns to the carry trade. Furthermore, our tail risk factor seems to price the returns to the carry trade better than factors such as volatility or skewness tested earlier in the literature. This result is natural because, by its construction, our indicator aggregates in one single variable all the information that these concurrent factors convey. And it makes sense since the ultimate risk for carry traders is to reach their funding limits which are set, because of the regulations, on the back of tail risk statistics (Value at Risk) and not simply on the back of the volatility or the skewness alone. The result holds whether the global tail risk indicators are estimated in the currency, the equity or the bond market.
Book Synopsis Exploring Currency Risk Factors Via Corridor Implied Volatility and Its Term Structures Dynamics During Crisis by : Jingyi Li
Download or read book Exploring Currency Risk Factors Via Corridor Implied Volatility and Its Term Structures Dynamics During Crisis written by Jingyi Li and published by . This book was released on 2020 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper extends the application of corridor implied volatility by Andersen et al. (2015) to currency market, empirically measuring currency risks at multiple horizons, and finds its term structure contains useful information, both for profitable trading strategies and for common risk factors constructions on the basis of Lustig et al. (2011). I consistently find that for currencies paired by US dollars, the term structure of currency risk is flat at a low level prior to the 2008 crisis, upward-sloping after the crisis and peaks at a high level with a prominently negative slope during the crisis. This work is believed to be new in the currency research field. I then use this information to build trading strategies, earning a profit by longing currencies with the highest level or slope and shorting ones with the lowest level or slope. The profit by sorting slope is significantly high and robust to the 2008 crisis period, with a low correlation to the Carry Trade return, suggesting extra information in risk than the interest rate. Next, I extract global risk factors by level and slope to help understand the currency excess return, a long-lasting puzzle. The global risk factor by level substantially improves the cross-sectional explanatory power in currency excess returns compared to Lustig et al. (2011). Furthermore, I show that there is certain high risk corresponding to a high level and low slope, and high interest rate currency earns returns co-varying negatively to this risk, implying that it is a risky asset and thus requires a high risk premium, which explains the Carry Trade return well.
Book Synopsis The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by : Tim Lee
Download or read book The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis written by Tim Lee and published by McGraw Hill Professional. This book was released on 2019-12-13 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy—and the meteoric rise of carry. The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy—until now. A groundbreaking book sure to leave its mark in the canon of investing literature, The Rise of Carry explains how carry trading has virtually shaped the global economic picture—one of decaying economic growth, recurring crises, wealth disparity, and, in too many places, social and political upheaval. The authors explain how carry trades work—particularly in the currency and stock markets—and provide a compelling case for how carry trades have come to dominate the entire global business cycle. They provide thorough analyses of critical but often overlooked topics and issues, including: •The active role stock prices play in causing recessions—as opposed to the common belief that recessions cause price crashes •The real driving force behind financial asset prices •The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle •How positive returns to carry over time are related to market volatility—and how central bank policies have supercharged these returns Simply put, carry trading is now the primary determinant of the global business cycle—a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. The Rise of Carry provides foundational knowledge and expert insights you need to protect yourself from what have come to be common market upheavals—as well as the next major crisis.
Book Synopsis Handbook of Exchange Rates by : Jessica James
Download or read book Handbook of Exchange Rates written by Jessica James and published by John Wiley & Sons. This book was released on 2012-05-29 with total page 674 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Handbook of Exchange Rates “This book is remarkable. I expect it to become the anchor reference for people working in the foreign exchange field.” —Richard K. Lyons, Dean and Professor of Finance, Haas School of Business, University of California Berkeley “It is quite easily the most wide ranging treaty of expertise on the forex market I have ever come across. I will be keeping a copy close to my fingertips.” —Jim O’Neill, Chairman, Goldman Sachs Asset Management How should we evaluate the forecasting power of models? What are appropriate loss functions for major market participants? Is the exchange rate the only means of adjustment? Handbook of Exchange Rates answers these questions and many more, equipping readers with the relevant concepts and policies for working in today’s international economic climate. Featuring contributions written by leading specialists from the global financial arena, this handbook provides a collection of original ideas on foreign exchange (FX) rates in four succinct sections: • Overview introduces the history of the FX market and exchange rate regimes, discussing key instruments in the trading environment as well as macro and micro approaches to FX determination. • Exchange Rate Models and Methods focuses on forecasting exchange rates, featuring methodological contributions on the statistical methods for evaluating forecast performance, parity relationships, fair value models, and flow–based models. • FX Markets and Products outlines active currency management, currency hedging, hedge accounting; high frequency and algorithmic trading in FX; and FX strategy-based products. • FX Markets and Policy explores the current policies in place in global markets and presents a framework for analyzing financial crises. Throughout the book, topics are explored in-depth alongside their founding principles. Each chapter uses real-world examples from the financial industry and concludes with a summary that outlines key points and concepts. Handbook of Exchange Rates is an essential reference for fund managers and investors as well as practitioners and researchers working in finance, banking, business, and econometrics. The book also serves as a valuable supplement for courses on economics, business, and international finance at the upper-undergraduate and graduate levels.
Book Synopsis Investment: Tax policy and the cost of capital by : Dale Weldeau Jorgenson
Download or read book Investment: Tax policy and the cost of capital written by Dale Weldeau Jorgenson and published by MIT Press. This book was released on 1996 with total page 514 pages. Available in PDF, EPUB and Kindle. Book excerpt: V.1 Capital theory and investment behavior -- V.2 Tax policy and the cost of capital.
Book Synopsis International Convergence of Capital Measurement and Capital Standards by :
Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
