No abstract

Carry trades consistently generate high excess returns with high Sharpe ratios. I propose a new factor -the downside market factor -to explain the high currency returns. I show that carry trades crash systematically in the worst states of the world, when the stock market plunges or a disaster happens. High-interest currencies have significantly high downside market betas and significantly negative coskewness with the stock market, while low-interest currencies can serve as a hedging instrument against the downside market risk. The downside market factor can explain 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 its theoretical value. Therefore, the high returns to carry trades are a fair compensation for their high downside market risk. JEL classification: G12, G15, F31

No abstract

Despite the impressive economic growth in Russia between 1999 and 2007 there is a fear that Russia may suffer the Dutch disease, which predicts that a country with large natural resource rents may experience de-industrialisation and lower long-term economic growth. This article examines whether there are any symptoms of the Dutch disease in Russia. Using a variety of Rosstat publications and the CHELEM database, we analyse the trends in production, wages and employment in Russian manufacturing industries, and we study the behaviour of Russian imports and exports. We find that, while Russia exhibits some symptoms of the Dutch disease, e.g. the real appreciation of the ruble, the rise in real wages, the decrease in employment in manufacturing industries and the development of the services sector, manufacturing production nonetheless increased, contradicting the theory of the Dutch disease. These trends can be explained by the gains in productivity and the recovery after the disorganisation in the 1990s, by new market opportunities for Russian products in the European Union and in CIS countries, by a growing Chinese demand for some products and by a booming internal market. Finally, investment in many manufacturing industries was largely encouraged, whereas investment in the energy sector was strongly regulated, which contributed to economic diversification.