The tail risk premia of the carry trades

Dupuy, Philippe

doi:10.1016/j.jimonfin.2015.07.016

Cited by 16 publications

(6 citation statements)

References 33 publications

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“…Our evidence, that the pandemic is a destabilizing event for FX markets, is in line with prior research on the time-varying performance of the FX markets in turbulent periods, such as the 1992 European financial crisis ( Aroskar et al, 2004 ), the 1997–1998 Asian financial crisis ( Al-Khazali et al, 2012 ; Jeon & Seo, 2003 ; Kan & Andreosso-O’Callaghan, 2007 ), and the 2007–2008 global financial crisis ( Ahmad et al, 2012 ; Baba & Packer, 2009 ; Beckmann & Czudaj, 2017 ; Dupuy, 2015 ; Farhi et al, 2009 ; Farhi & Gabaix, 2008 ; Fratzscher, 2009 ; Yamani, 2021 ). Our results also in line with recent research suggesting that COVID-19 has increased global uncertainty in financial markets ( Ali et al, 2020 ; Altig et al, 2020 ; Bai et al, 2021 ; Baker et al, 2020 ).…”

Section: Resultssupporting

confidence: 90%

“…Similarly, prior research has found that the 2007–2008 financial crisis has caused a time variation in the performance of FX markets ( Baba & Packer, 2009 ; Ball, 2009 ; Beckmann & Czudaj, 2017 ; Berg & Mark, 2018 ; Brunnermeier et al, 2008 ; Bush & Stephens, 2015 ; Doukas & Zhang, 2013 ; Dupuy, 2015 ; Farhi et al, 2009 ; Farhi & Gabaix, 2008 ; Fatum & Yamamoto, 2016 ; Fratzscher, 2009 ; Kinateder et al, 2021 ; Matvos & Seru, 2014 ; Yamani, 2021 ).…”

Section: Literature Reviewmentioning

confidence: 86%

“…To the best of our knowledge, this article is the first early attempt to examine the impact of COVID-19 pandemic on FX market efficiency. A critical review of the FX market efficiency literature reveals that there has been an academic research on the response of the FX market efficiency to the 1997–1998 Asian crisis ( Ahmad et al, 2012 ; Aroskar et al, 2004 ; Jeon & Seo, 2003 ; Kan & Andreosso-O’Callaghan, 2007 ) and the 2007–2008 financial crisis ( Baba & Packer, 2009 ; Beckmann & Czudaj, 2017 ; Berg & Mark, 2018 ; Brunnermeier et al, 2008 ; Doukas & Zhang, 2013 ; Dupuy, 2015 ; Farhi et al, 2009 ; Farhi & Gabaix, 2008 ; Fatum & Yamamoto, 2016 ; Fratzscher, 2009 ), but no such exploration has been undertaken in the wake of the COVID pandemic. Therefore, our study complements this literature by examining the pandemic impact on the FX market efficiency.…”

Section: Introductionmentioning

confidence: 99%

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Foreign exchange market efficiency during COVID-19 pandemic

Azzam

El‐Masry

Yamani

2023

International Review of Economics & Finance

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Section: Resultssupporting

confidence: 90%

Section: Literature Reviewmentioning

confidence: 86%

Section: Introductionmentioning

confidence: 99%

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Foreign exchange market efficiency during COVID-19 pandemic

Azzam

El‐Masry

Yamani

2023

International Review of Economics & Finance

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“…The UIP hypothesis suggests that there should be an equilibrium between anticipated changes in exchange rates and interest rate differentials across countries. Notably, for UIP to hold, a condition of a one-to-one relationship must exist in order to counterbalance the discrepancies in changes in exchange rates and interest rate differentials between two countries (see Fama 1984;Hodrick and Srivastava 1986).…”

Section: Introductionmentioning

confidence: 99%

Carry Trade and Capital Market Returns in South Africa

Rangoanana

Bonga‐Bonga

2022

JRFM

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This paper assesses the extent to which carry trade operations affect the performance of equity and bond markets in a target country, South Africa, by considering the US and the euro area as the funding countries. A two- and three-factor capital asset pricing model (CAPM) is employed to assess whether the pricing of equity and bond markets in South Africa depends on the US dollar/rand and euro/rand carry trade returns. Moreover, the paper uses the quantile regression technique to assess whether this pricing varies with the distribution of the equity and bond returns. The findings support that the US- and euro-funded carry trade are essential factors for the pricing of equity and bond markets in South Africa. Moreover, the results of the two-factor model show a negative relationship between the equity excess return and the US-carry trade returns at lower quantiles of the equity market returns. The positive relationship is observed in the upper quantiles of the equity market. The negative relationship means that carry trade activities reduce equity market returns during a bear market as investors close out their position when conditions in the equity market become unfavourable. The results of the three-factor model, controlling for the global volatility or uncertainty, show that carry trade investors exit the equity market to invest in the bond market when global uncertainty rises. This finding shows that carry trade investors choose less risky assets during rising global uncertainty.

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“…In a similar vein, Farhi, Fraiberger, Gabaix, Ranciere, and Verdelhan (2015), and Chernov, Graveline, and Zviadadze (2018) develop theoretical models to formally evaluate the crash risk of different currencies and find that approximately one third of carry trade returns is due to disaster risk. Moreover, Dupuy (2015) constructs an empirical global tail risk factor, where tail risk is understood as the interaction of different moments, and shows that it prices the cross-section of currency carry trade returns.…”

Section: Introductionmentioning

confidence: 99%

Crash-o-phobia in Currency Carry Trade Returns

Hammerschmid

Janssen

2018

SSRN Journal

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Currency carry trade returns are on average large and non-normally distributed. While the literature has found different explanations for the existence of carry trade returns, the higher order moments of their return distribution still pose a puzzle. We propose a new model to explain these non-normal properties of currency carry trade returns, by assuming that agents are loss averse and overweight states with low probabilities. This combination of loss aversion and probability weighting is called crash-o-phobia. Using non-linear least squares and riskneutral state prices implied by currency options, we estimate this crash-o-phobia model to price developed and emerging market currencies. The parameter estimates reveal crash-ophobic beliefs and preferences with significant differences across currencies. Compared to a model with rational beliefs and CRRA utility, our crash-o-phobia model performs significantly better at explaining the whole distribution of currency carry trade returns.

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The tail risk premia of the carry trades

Cited by 16 publications

References 33 publications

Foreign exchange market efficiency during COVID-19 pandemic

Foreign exchange market efficiency during COVID-19 pandemic

Carry Trade and Capital Market Returns in South Africa

Crash-o-phobia in Currency Carry Trade Returns

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