Speculative capital and currency carry trades


Spring Meeting of Young Economists Also, the two recessions in the early 90s and s did not have any significant influence on returns. The economics of insurance and its borders with general finance. There is a significantly negative co-movement of high-interest-rate currencies carry-trade-investment currencies with global foreign-exchange volatility innovations, whereas low-interest-rate currencies carry-trade-funding currencies provide a hedge against unexpected volatility changes. These returns cannot be explained by standard measures of speculative capital and currency carry trades e.

The carry trade — speculative capital and currency carry trades in currencies with low interest rates and investing in currencies with high interest rates — has been a surprising hit for decades. Bars show the annualised mean returns of the carry-trade portfolio. Average excess returns for the long-short portfolios decrease monotonically when moving from the low to the high-volatility states for the sample of developed countries, and almost monotonically for the full sample of countries. While this analysis is intentionally simple, it intuitively demonstrates a clear relationship between global foreign-exchange volatility innovations and returns to carry-trade portfolios. A simple and theoretically convincing solution for this puzzle is the consideration of time-varying risk premia.

Figure 1 shows cumulative returns for the carry-trade portfolio for all countries and for the smaller sample of developed countries. Exchange rates International finance. Independent speculative capital and currency carry trades on the Greek official debt. We test whether the sensitivity of excess returns to global foreign-exchange volatility risk can rationalise the returns to currency portfolios in a standard asset-pricing framework. The economics of insurance and its borders with general finance.

As can be seen from the figure, high-interest-rate currencies clearly yield higher excess returns when volatility risk is low and vice versa. Professor of Finance, Cass Business School. Putting the Greek debt problem to rest.

Further analysis shows that liquidity risk also matters for the cross-section of currency returns, albeit to a lesser degree. Financial engineering will not stabilise an unstable euro area. Step 1 — Agreeing a Crisis narrative.

Professor of Economics, Humboldt-University of Berlin. There is a significantly negative co-movement of high-interest-rate currencies carry-trade-investment currencies with global foreign-exchange volatility innovations, whereas low-interest-rate currencies carry-trade-funding currencies provide a hedge against unexpected volatility changes. The Permanent Effects of Fiscal Consolidations. Miles, Taylor, Steger, Chadha. Cumulative carry trade speculative capital and currency carry trades Figure 2 provides a graphical analysis to illustrate our point we carry out extensive tests to establish our results in our paper.

Also, the two recessions in the early 90s and s did not have any significant influence on returns. Cumulative carry trade returns Figure 2 provides a graphical analysis to illustrate our point we carry out extensive tests to establish our results in speculative capital and currency carry trades paper. The risk in carry trades Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf 23 March The carry trade — borrowing in currencies with low interest rates and investing in currencies with high interest rates — has been a surprising hit for decades. Figure 1 shows cumulative returns for the carry-trade portfolio for all countries and for the smaller sample of developed countries. Rising house prices and inequality.

We test whether speculative capital and currency carry trades sensitivity of excess returns to global foreign-exchange volatility risk can rationalise the returns to currency portfolios in a standard asset-pricing framework. Economic Forecasting with Large Datasets. If anything, the opposite holds true empirically — high-interest-rate currencies tend to appreciate while low-interest-rate currencies tend to depreciate. The graph also shows our proxy for global foreign-exchange volatility and its innovations, which appears to pick up obvious times of turmoil, including the recent financial crisis.