The Carry Trade: Risks and Drawdowns

Daniel, Kent; Hodrick, Robert J.; Lu, Zhongjin

doi:10.3386/w20433

Cited by 38 publications

(36 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Specifically, following Daniel et al (), an dollar‐based investor goes long (short) one dollar in the Chinese Renminbi (RMB) in the forward market when the forward rate f k , t is higher (lower) than the spot rate SPOT t . The carry trade is implemented as a zero investment strategy, and the dollar payoff to this simple carry trade strategy without transaction costs can be written as

{\begin{cases} center & z_{t + k} = w_{t} (\frac{f_{t, k} - s_{t + k}}{s_{t + k}}) i f f_{t, k} > s_{t} \\ center & z_{t + k} = - w_{t} (\frac{f_{t, k} - s_{t + k}}{s_{t + k}}) i f f_{t, k} < s_{t} \\ center & z_{t + k} = \begin{matrix} center \\ center 0 & center otherwise \end{matrix} \end{cases}

where w t is the scale of forward positions and we set w t = $1 throughout the exercises.…”

Section: Resultsmentioning

confidence: 99%

See 1 more Smart Citation

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

Tong

Wang

Yang

2015

Journal of Futures Markets

View full text Add to dashboard Cite

We apply a new model selection approach that allows for the joint determination of structural breaks and cointegration to examine the term structure of Chinese Renminbi (RMB)‐U.S. dollar spot and forward exchange rates during the managed‐floating period of 2005–2013. We find that the RMB market has exhibited different dynamic relationships between spot and forward exchange rates over time, apparently due to significant policy changes. Offshore forward rates with either shorter or longer maturities can substantially explain the in‐sample variation of the onshore spot exchange rate at longer horizons, while only the offshore forward rate with a shorter maturity can significantly predict RMB onshore spot rate changes out‐of‐sample. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:695–718, 2016

show abstract

{\begin{cases} center & z_{t + k} = w_{t} (\frac{f_{t, k} - s_{t + k}}{s_{t + k}}) i f f_{t, k} > s_{t} \\ center & z_{t + k} = - w_{t} (\frac{f_{t, k} - s_{t + k}}{s_{t + k}}) i f f_{t, k} < s_{t} \\ center & z_{t + k} = \begin{matrix} center \\ center 0 & center otherwise \end{matrix} \end{cases}

where w t is the scale of forward positions and we set w t = $1 throughout the exercises.…”

Section: Resultsmentioning

confidence: 99%

“…If forward rates are an unbiased predictor and uncovered interest rate parity holds, then the carry trade profits should average to zero. However, as pointed out by Daniel et al (), uncovered interest rate parity ignores the possibility that changes in the values of currencies are exposed to risk factors, in which case risk premiums can arise…”

Section: Resultsmentioning

confidence: 99%

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

Tong

Wang

Yang

2015

Journal of Futures Markets

View full text Add to dashboard Cite

show abstract

“…Bhansali (2007) and Menkhoff et al (2012b) show that carry strategies produce poor returns when exchange rate volatility is high. The question of whether returns to the carry trade represent compensation for exposure to risk factors has been addressed by a number of recent studies; including Lustig and Verdelhan (2007), Lustig et al (2011), Farhi andGabaix (2016), ), Menkhoff et al (2012a and Daniel et al (2014) (see Burnside, 2012 for a review). In this paper we do not take a stand on the source of the predictability in carry trade returns.…”

Section: Related Literaturementioning

confidence: 99%

Exchange Rates, Interest Rates and the Global Carry Trade

Evans

Rime

2017

SSRN Journal

View full text Add to dashboard Cite

“…(1) For the equation above, 1 ,t s FFR denotes the yield of the first federal fund futures contract 7 at day t of month s, which is equal to the expected average federal fund rate, i r , from day 1 to day m in that month. We assume that month s has total m days, and 1 ,t s  is the risk premium for the first futures contract.…”

Section: Measuring Monetary Policy and The Empirical Modelmentioning

confidence: 99%

Monetary Policy Surprises and the Responses of Asset Prices: An Event Study Analysis

Jiang¹,

Wang²

2017

SEC

View full text Add to dashboard Cite

The monetary policy shocks have been widely regarded to have effects on the financial markets. Before the 2008 financial crisis, the Federal Reserve adjusted the federal funds target rate to implement the monetary policy. This paper uses event studies to examine the relationship between the Federal Reserve's interest rate decisions and the asset prices. We find that treasury bills and exchange rates of the developed countries were significantly influenced by the FED's unexpected monetary policy shocks from the year of 1989 to 2008. However, in the same period, exchange rates of the emerging markets responded weakly to the policy surprises. We also have observed that international equity markets and commodity prices were not sensitive to the rate decisions of the Federal Reserve. In addition, Treasury bill yields responded significantly to the anticipated and unanticipated rate decisions in both pre and post FOMC meeting days. We also show that the FED's unexpected monetary policy had significant 5 day post announcement impacts on prices of almost all assets.

show abstract

The Carry Trade: Risks and Drawdowns

Cited by 38 publications

References 34 publications

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

Exchange Rates, Interest Rates and the Global Carry Trade

Monetary Policy Surprises and the Responses of Asset Prices: An Event Study Analysis

Contact Info

Product

Resources

About