The Carry Trade: Risks and Drawdowns

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

doi:10.1561/104.00000051

Cited by 61 publications

(13 citation statements)

References 35 publications

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“…In many cases, the instability involved a change in the sign of the forward rate bias. Not surprisingly, Baillie and Cho (2014) and Daniel et al (2017) find that carry trade strategies produced large losses after 2008. Few economists or market participants predicted the financial crisis, let alone its impact on currency markets and forward rate bias.…”

Section: Unpredictability and Imperfect Knowledgementioning

confidence: 95%

“…In stock markets, see Pettenuzzo and Timmermann (2011); Frydman and Goldberg (2011); Ang and Timmermann (2012), and Frydman et al (2015). 38 Brunnermeier et al (2008), Daniel et al (2017) and others find that carry trade returns are highly negatively skewed, which gives a measure of what they call âcrash or downside ârisk. These studies examine only developed-country markets.…”

Section: Developed Countries Are More Risky Not Less Rationalmentioning

confidence: 99%

“…SeeBaillie and Cho (2014);Brunnermeier et al (2008);Melvin and Taylor (2009), andDaniel et al (2017) for additional evidence of this time dependency and riskiness.33 The Wald tests inTable 9consider the inidividual subsample biases, negative and positive, for developed and developing countries. The test is conducted under the null that the negative and positive biases for the two country groups are equal at mean.…”

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confidence: 99%

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Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

2020

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This paper examines the stability of the Bilson–Fama regression for a panel of 55 developed and developing countries. We find multiple break points for nearly every country in our panel. Subperiod estimates of the slope coefficient show a negative bias during some time periods and a positive bias during other time periods in nearly every country. The subperiod biases display two key patterns that shed light on the literature’s linear regression findings. The results point toward the importance of risk in currency markets. We find that risk is greater for developed country markets. The evidence undercuts the widespread view that currency returns are predictable or that developed country markets are less rational.

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Section: Unpredictability and Imperfect Knowledgementioning

confidence: 95%

Section: Developed Countries Are More Risky Not Less Rationalmentioning

confidence: 99%

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confidence: 99%

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Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

2020

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“…These are found in Tables 14.4 and 14.5 for a prefinancial-crisis data period. There is one data set that would seem to constitute an exception to this rule, and that is found in Daniel et al (2014). This has been the case most profoundly for the SMB factor.…”

Section: Models With Factor-mimicking Portfoliosmentioning

confidence: 99%

The Arbitrage Pricing Theory

Danthine

Donaldson

2015

Intermediate Financial Theory

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“…This explanation has resulted in a flurry of research on the time-varying performance of the FX markets across tranquil and turbulent periods ( Ahmad et al, 2012 ; Flood & Rose, 2002 ; Grossmann et al, 2014 ; Lothian & Wu, 2011 ; Shehadeh et al, 2021 ; Zhou & Kutan, 2005 ). A related line of research has proposed crash risk as an alternative explanation to the forward premium puzzle ( Atanasov & Nitschka, 2014 ; Brunnermeier et al (2009), Daniel et al (2017) , Farhi and Gabaix (2008 and 2016) , and Jurek (2014) .…”

Section: Introductionmentioning

confidence: 99%