Good Carry, Bad Carry

2019 ◽  
Vol 55 (4) ◽  
pp. 1063-1094 ◽  
Author(s):  
Geert Bekaert ◽  
George Panayotov
Keyword(s):  
Crash Risk ◽  
Carry Trade ◽  
Australian Dollar ◽  
Sharpe Ratios ◽  
Japanese Yen ◽  
Positive Return

We distinguish between “good” and “bad” carry trades constructed from Group of Ten (G-10) currencies. The good trades exhibit higher Sharpe ratios and sometimes positive return skewness, in contrast to the bad trades, which have both substantially lower Sharpe ratios and highly negative return skewness. Surprisingly, good trades do not involve the most typical carry currencies like the Australian dollar and Japanese yen. The distinction between good and bad carry trades significantly alters our understanding of currency carry trade returns, and invalidates, for example, explanations invoking return skewness and crash risk.

scholarly journals The predictive capacity of GARCH-type models in measuring the volatility of crypto and world currencies

PLoS ONE ◽  
2021 ◽  
Vol 16 (1) ◽  
pp. e0245904
Author(s):  
Viviane Naimy ◽  
Omar Haddad ◽  
Gema Fernández-Avilés ◽  
Rim El Khoury
Keyword(s):  
Value At Risk ◽  
Risk Measure ◽  
Canadian Dollar ◽  
Swiss Franc ◽  
Garch Models ◽  
Predictive Capacity ◽  
Australian Dollar ◽  
Forecasting Performance ◽  
Out Of Sample ◽  
Japanese Yen

This paper provides a thorough overview and further clarification surrounding the volatility behavior of the major six cryptocurrencies (Bitcoin, Ripple, Litecoin, Monero, Dash and Dogecoin) with respect to world currencies (Euro, British Pound, Canadian Dollar, Australian Dollar, Swiss Franc and the Japanese Yen), the relative performance of diverse GARCH-type specifications namely the SGARCH, IGARCH (1,1), EGARCH (1,1), GJR-GARCH (1,1), APARCH (1,1), TGARCH (1,1) and CGARCH (1,1), and the forecasting performance of the Value at Risk measure. The sampled period extends from October 13th 2015 till November 18th 2019. The findings evidenced the superiority of the IGARCH model, in both the in-sample and the out-of-sample contexts, when it deals with forecasting the volatility of world currencies, namely the British Pound, Canadian Dollar, Australian Dollar, Swiss Franc and the Japanese Yen. The CGARCH alternative modeled the Euro almost perfectly during both periods. Advanced GARCH models better depicted asymmetries in cryptocurrencies’ volatility and revealed persistence and “intensifying” levels in their volatility. The IGARCH was the best performing model for Monero. As for the remaining cryptocurrencies, the GJR-GARCH model proved to be superior during the in-sample period while the CGARCH and TGARCH specifications were the optimal ones in the out-of-sample interval. The VaR forecasting performance is enhanced with the use of the asymmetric GARCH models. The VaR results provided a very accurate measure in determining the level of downside risk exposing the selected exchange currencies at all confidence levels. However, the outcomes were far from being uniform for the selected cryptocurrencies: convincing for Dash and Dogcoin, acceptable for Litecoin and Monero and unconvincing for Bitcoin and Ripple, where the (optimal) model was not rejected only at the 99% confidence level.

scholarly journals Beyond the Carry Trade: Optimal Currency Portfolios

2015 ◽  
Vol 50 (5) ◽  
pp. 1037-1056 ◽  
Author(s):  
Pedro Barroso ◽  
Pedro Santa-Clara
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Current Account ◽  
Sharpe Ratio ◽  
Optimal Portfolio ◽  
Crash Risk ◽  
Portfolio Performance ◽  
Carry Trade ◽  
The Real ◽  
Out Of Sample

AbstractWe test the relevance of technical and fundamental variables in forming currency portfolios. Carry, momentum, and value reversal all contribute to portfolio performance, whereas the real exchange rate and the current account do not. The resulting optimal portfolio produces out-of-sample returns that are not explained by risk and are valuable to diversified investors holding stocks and bonds. Exposure to currencies increases the Sharpe ratio of diversified portfolios by 0.5 on average, while reducing crash risk. We argue that besides risk, currency returns reflect the scarcity of speculative capital.

Optimal currency hedge and the carry trade

2020 ◽  
Vol 19 (3) ◽  
pp. 411-427
Author(s):  
Fabio Filipozzi ◽  
Kersti Harkmann
Keyword(s):  
Foreign Currency ◽  
Ordinary Least Squares ◽  
Carry Trade ◽  
Portfolio Risk ◽  
Content Type ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Sharpe Ratios ◽  
Optimal Hedge ◽  
Weekly Frequency

Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

scholarly journals The information content of risk reversals in emerging market currencies

2016 ◽  
Vol 14 (3) ◽  
pp. 403
Author(s):  
Adonias Evaristo da Costa Filho
Keyword(s):  
Risk Aversion ◽  
Information Content ◽  
Emerging Market ◽  
Crash Risk ◽  
Panel Var ◽  
Evidence Based ◽  
Carry Trade ◽  
Global Risk ◽  
Vector Autoregressions ◽  
Highly Correlated

This paper analyzes the information content of risk reversals for ten emerging market currencies. In contrast to the findings for major developed currencies, it is found that in some cases risk reversals (RR) are helpful in predicting currency returns, but in general RR are predicted by but do not predict carry trade returns. Evidence based on country vector autoregressions (VARs) and a panel VAR (PVAR) indicate that RR react in a procyclicalway to carry returns, i.e., it is cheaper (more expensive) to buy protection against currency weakness after positive (negative) total returns. All in all, it is found that crash risk accounts for a small share of carry trade returns variance, which seems to be more related to global risk aversion shocks. A sentiment indicator of crash risk in emerging market currencies is highly correlated with the VIX.

scholarly journals Investor Sentiment and Crash Risk in Safe Havens

2019 ◽  
Vol 10 (6A) ◽  
pp. 97-108 ◽  
Author(s):  
Adnen Ben Nasr ◽  
Matteo Bonato ◽  
Riza Demirer ◽  
Rangan Gupta
Keyword(s):  
Investor Sentiment ◽  
Spillover Effects ◽  
Crash Risk ◽  
Safe Haven ◽  
Wide Range ◽  
Japanese Yen ◽  
Return Dynamics ◽  
The Relationship

This study examines the relationship between investor sentiment and intraday return dynamics for safe haven assets, with a particular focus on crash risk in these assets. Examining intraday returns for a wide range of safe havens proposed in the literature, we find that shocks to investor sentiment have a significant effect on safest havens, while the sentiment is heterogeneous both in terms of its size and direction. While the strongest effects of sentiment shocks are observed in the case of Gold, Swiss Francs and Japanese Yen, interestingly, we find that oil stands out from the rest of the pack, responding negatively to sentiment shocks, suggesting that positive shocks to sentiment (i.e. high fear) increase crash risk for this asset. Our findings also point to intra-safe haven spillover effects, with oil exhibiting a markedly different pattern. Investment and hedging implications are discussed next.

scholarly journals Uncovered interest rate parity on the Japanese yen exchange rate market

2012 ◽  
Vol 3 (3) ◽  
pp. 63-77
Author(s):  
Katarzyna Czech
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Forecast Error ◽  
Forward Rate ◽  
Carry Trade ◽  
Interest Rate Parity ◽  
Uncovered Interest Rate Parity ◽  
Rate Parity ◽  
Japanese Yen ◽  
Exchange Rate Markets

The aim of the paper is to verify the uncovered interest rate parity hypothesis on the Japanese yen exchange rate market. The article describes the theory of uncovered interest rate parity and presents the review of previous research results. Moreover, the paper characterizes the currency speculation strategy „carry trade” which is fundamentally based on the assumption that the uncovered interest rate parity doesn’t hold. The Japanese yen is one of the most popular „carry trade” funding currency and therefore the article is focused on the analysis of this exchange rate market.The uncovered interest rate parity condition suggests that „carry trade” strategy should not result in excess profits. However, the high average payoff to „carry trade” is widely documented by many researchers and thus it may imply that uncovered interest rate parity doesn’t hold on the Japanese yen market. The uncovered interest rate parity on the Japanese yen market is tested by applying the conventional regression approach and orthogonality test of the forward rate forecast error. The results show that it is hard to say definitely that uncovered interest rate parity holds on the analyzed exchange rate market. The uncovered interest rate parity hypothesis is rejected for JPY/TRY market. However, there is not enough evidence to reject UIP hypothesis for JPY/NZD and JPY/USD exchange rate markets.

Is a Japanese yen a safe haven? Relationship between Japanese currency and financial market uncertainty

2021 ◽  
Author(s):  
Katarzyna Czech ◽  
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Financial Market ◽  
Financial Stress ◽  
Sudden Increase ◽  
Market Uncertainty ◽  
Carry Trade ◽  
Safe Haven ◽  
Low Interest Rates ◽  
Japanese Yen

Japan's low-interest rates made the country's currency the primary funding currency in carry trade speculative strategies. Investors' activity in carry trade strategies has an enormous impact on the foreign exchange market volatility. A large inflow of capital to countries with higher interest rates contributes to their currency appreciation, and, in turn, a large outflow of capital from countries with a low-interest rate leads to a significant depreciation of their currency. However, in times of crisis and high uncertainty in the financial markets, investors massively withdraw from the carry trade. They sell financial assets purchased in a country with higher interest rates and then repay loans taken in a country with low-interest rates. A sudden increase in the supply of a country's currency with higher interest rates leads to its depreciation. On the other hand, the rise in demand for a country's currency with low-interest rates leads to its appreciation. The Japanese yen is one of the most popular funding currency in the carry trade and thus tends to appreciate during crisis periods. The paper aims to investigate the relationship between Japanese yen value and financial market uncertainty measured by the Volatility Index VIX and St. Louis FED Financial Stress Index. Based on the component generalized autoregressive conditional heteroscedasticity model CGARCH with asymmetric threshold term, it has been shown that the increase in financial markets uncertainty contributes to significant appreciation of the Japanese yen against the US dollar. It implies that the Japanese currency is an example of a safe-haven currency and can be applied to hedge financial stress for global equity investors.

Intraday analysis of currency ETFs

2015 ◽  
Vol 11 (4) ◽  
pp. 438-450 ◽  
Author(s):  
Stoyu I. Ivanov
Keyword(s):  
Performance Metrics ◽  
Tracking Error ◽  
Canadian Dollar ◽  
Swiss Franc ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Content Type ◽  
Australian Dollar ◽  
Minute Interval ◽  
Japanese Yen

Purpose – The purpose of this paper is to find if erosion of value exists in grantor trust structured exchange traded funds. The author examines the performance of six currency exchange traded funds’ tracking errors and pricing deviations on intradaily-one-minute interval basis. All of these exchange traded funds are grantor trusts. The author also studies which metric is of more importance to investors in these exchange traded funds by examining how these performance metrics are related to the exchange traded funds’ arbitrage mechanism. Design/methodology/approach – The Australian Dollar ETF (FXA) is designed to be 100 times the US Dollar (USD) value of the Australian Dollar, the British Pound ETF (FXB) is designed to be 100 times the USD value of the British Pound, the Canadian Dollar ETF (FXC) is designed to be 100 times the USD value of the Canadian Dollar, the Euro ETF (FXE) is designed to be 100 times the USD value of the Euro, the Swiss Franc ETF (FXF) is designed to be 100 times the USD value of the Swiss Franc and the Japanese Yen ETF (FXY) is designed to be 10,000 times the USD value of the Japanese Yen. The author uses these proportions to estimate pricing deviations. The author uses a moving average model based on an Elton et al. (2002) to estimate if tracking error or pricing deviation are more relevant in ETF arbitrage and thus to investors. Findings – The author documents that the average intradaily tracking errors for the six currency ETFs are relatively small and stable. The tracking errors are highest for the FXF, 0.000311 percent and smallest for FXB, −0.000014 percent. FXB is the only ETF with a negative tracking error. All six ETFs average intradaily pricing deviations are negative with the exception of the FXA pricing deviation which is a positive $0.17; the rest of the ETFs pricing deviations are −0.3778 for FXB, −0.3231 for FXC, −0.2697 for FXC, −0.2697 for FXE, −0.6484 for FXF and −0.9273 for FXY. All exhibit skewness, kurtosis, very high levels of positive autocorrelation and negative trends, which suggests erosion of value. The author also found that these exchange traded funds’ arbitrage mechanism is more closely related to the exchange traded funds’ pricing deviation than tracking error. Research limitations/implications – The paper uses high-frequency one-minute interval data in the analysis of pricing deviation which might be artificially deflating standard errors and thus inflating the t-test significance values. Originality/value – The paper is relevant to ETF investors and contributes to the continuing search in the finance literature of better ETF performance metric.

Methodology for determining motorcycle operator crash risk and alcohol impairment-Volume II: Literature review report

2007 ◽  
Author(s):  
Robert B. Voas ◽  
Terry A. Smith ◽  
David R. Thom ◽  
James McKnight ◽  
John W. Zellner ◽  
...  
Keyword(s):  
Literature Review ◽  
Crash Risk ◽  
Alcohol Impairment
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