Search Blog Entries
Feeds for this site
References and Recommendations

Creative Commons License
This work is licensed under a Creative Commons License.
Contact and login
Currently Reading
  • The Silk Roads: A New History of the World
    The Silk Roads: A New History of the World
    by Peter Frankopan
  • Eyes: Novellas and Stories
    Eyes: Novellas and Stories
    by William H. Gass
  • The Innocent
    The Innocent
    by Ian McEwan
Powered by Squarespace
« Working Paper 01-09: The ECB's Balance Sheet at a Glance | Main | Working Paper: Japan's Growth Path »

Carry Trade Fundamentals and the Financial Crisis 2007-2010

[Note: this paper is a new, and hopefully better, version of my earlier paper on the same topic.]

Vistesen, Claus (2009) - Carry Trade Fundamentals and the Financial Crisis 2007-2010, Journal of Applied Economic Sciences, vol. IV issue 2(8)

This paper takes the form of an event study surrounding the current financial crisis. It proposes a theoretical relationship which can be used to model traditional carry trade crosses on a daily return basis as a negative function of equity returns and a positive function of market volatility. In order to test this theory, an Arbitrage Pricing Theory framework is adopted which is used to estimate the factor betas of carry trade crosses with respect to equity returns and market volatility. It is shown how the variation in the currency crosses explained by the functional relationship as well as the estimated factor betas have increased significantly in relation to the financial crisis. The results indicate that low yielding currencies (the JPY and CHF) can be successfully modeled as a negative function of equity returns and a positive function of volatility in the market. The results furthermore underpin studies that have shown how carry trading activity is highly sensitive towards sudden sparks of volatility and risk aversion, and thus how carry trade fundamentals are time varying.


Reader Comments (2)

this paper looks quite promising! and has a nice publisher! congrats!
October 12, 2009 | Unregistered Commenterveronica preotu

Thanks ... I missed this comment somehow, but thanks for noticing.

December 3, 2009 | Unregistered Commentercv

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
All HTML will be escaped. Hyperlinks will be created for URLs automatically.