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Downside market risk of carry trades

Dobrynskaya, Victoria (2014) Downside market risk of carry trades. Review of Finance, 18 (5). pp. 1885-1913. ISSN 1572-3097

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Identification Number: 10.1093/rof/rfu004

Abstract

I propose a new factor - the global downside market factor - to explain high returns to carry trades. I show that carry trades have high downside market risk, i.e. they crash systematically in the worst states of the world when the global stock market plunges or when a disaster occurs. The downside market factor explains 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 their theoretical value. High returns to carry trades are fair compensation for their high downside market risk.

Item Type: Article
Official URL: http://rof.oxfordjournals.org/
Additional Information: © 2014 Oxford University Press
Divisions: LSE
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited: 28 Aug 2014 13:37
Last Modified: 20 Jun 2019 01:58
Projects: 10-01-0069
Funders: National Research University Higher School of Economics
URI: http://eprints.lse.ac.uk/id/eprint/59178

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