Currency Returns, Skewness and Crash Risk

Rafferty, Barry

doi:10.2139/ssrn.2022920

Cited by 56 publications

(36 citation statements)

References 27 publications

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“…While earlier studies focused on the variance of FX returns, recent evidence points to the skewness of returns (Rafferty 2011;Brunnermeier et al 2009). High interest rate currencies tend to exhibit negatively-skewed returns, implying that they appreciate slowly over long periods but then crash abruptly, as illustrated for the JPY/AUD in Figure 5.…”

Section: E{s T+1 -S T } = (I T * -I T ) + Rp T (2)mentioning

confidence: 99%

The market microstructure approach to foreign exchange: Looking back and looking forward

King

Osler

Rime³

2013

Journal of International Money and Finance

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Research on foreign exchange (FX) market microstructure stresses the importance of order flow, heterogeneity among agents, and private information as crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit the data surprisingly well. But currency markets are evolving rapidly in response to new electronic trading technologies. Transparency has risen, trading costs have tumbled, and transaction speed has accelerated as new players have entered the market and existing players have modified their behavior. These changes will have profound effects on exchange rate dynamics. Looking forward, we highlight fundamental yet unanswered questions on the nature of private information, the impact on market liquidity, and the changing process of price discovery.We also outline potential microstructure explanations for long-standing exchange rate puzzles. JEL Classification: F31, G12, G15, C42, C82.

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Section: E{s T+1 -S T } = (I T * -I T ) + Rp T (2)mentioning

confidence: 99%

The market microstructure approach to foreign exchange: Looking back and looking forward

King

Osler

Rime³

2013

Journal of International Money and Finance

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“…Examples are the HML carry factor , global currency volatility factor (Menkhoff et al, 2012a), global currency skewness factor (Rafferty, 2011), FX correlation risk factor (Mueller et al, 2012), dollar factor (Verdelhan, 2012). Although these risk factors are successful in explaining the carry trade returns, they fail to explain stock portfolio returns (e.g.…”

Section: Empirical Literature On Currency Returnsmentioning

confidence: 99%

Downside Market Risk of Carry Trades

Dobrynskaya¹

2010

SSRN Journal

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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

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“…Carry trade can be conducted in many ways, but its simplest form is investing in high-interest currencies using low-interest currencies for funding. It has been well documented that such strategy is profitable generating a return that is similar to that of the S&P 500 as concluded by Burnside et al (2006), Lustig and Verdelhan (2007), Lusting et al (2011), Menkhoff et al (2012), Rafferty (2012), Bhatti (2012) and many others. Burnside et al (2006) found that for the period from 1977 to 2005 the cumulative return realised from carry trade was similar to that of investing in the S&P 500.…”

Section: Introductionmentioning

confidence: 60%

“…The use of the United Arab Emirates dirham (AED) in carry trade has shown to be profitable and that the use of the gulf cooperation council currencies in carry trade can be rewarding as concluded by AlAli and AlKulaib (2015) and AlAli et al (2016). On the other hand, by using AED in conventional carry trade we were unable to produce a better return than the S&P 500 nor it produced a better Sharpe ratio contradicting Burnside et al (2006), Lustig and Verdelhan (2007), Lusting et al (2011), Menkhoff et al (2012, Rafferty (2012) and Bhatti (2012) findings. Embedding a forecasting element in the selection process led to an improvement in all measuring criteria, except for the magnitude of error measures, confirming the findings of Della Corte et al (2009), Jorda and Taylor (2009), Moosa (2010, Schmidbauer et al (2010), Li (2011), Moosa and Halteh (2012).…”

Section: Resultsmentioning

confidence: 98%

The Use of Gulf Cooperation Council Currencies in Carry Trade: A Case Study of United Arab Emirates Dirham

AlAli¹

2016

International Journal of Financial Research

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This paper examines the profitability of using the United Arab Emirates dirham as a U.S. dollar pegged currency in carry trade. Carry trade is a speculative currency strategy that takes advantage of interest rate differential between two currencies. Literature has shown that such strategy generates returns that are almost similar to that of the S&P 500 but with double its Sharpe ratio. Results of this study show that implementing such strategy using pegged currencies produced positive returns and these results were improved when the selection process was enhanced with forecasting element.

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Currency Returns, Skewness and Crash Risk

Cited by 56 publications

References 27 publications

The market microstructure approach to foreign exchange: Looking back and looking forward

The market microstructure approach to foreign exchange: Looking back and looking forward

Downside Market Risk of Carry Trades

The Use of Gulf Cooperation Council Currencies in Carry Trade: A Case Study of United Arab Emirates Dirham

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