{"title":"Dynamic Risk Factors in Carry Trades","authors":"Seungho Baek, Kwan Yong Lee, Mina Glambosky","doi":"10.3905/jfi.2019.29.1.055","DOIUrl":null,"url":null,"abstract":"The authors decompose a simple cross-country interest rate differential into three cross-country differential factors, originated from the Nelson–Siegel model. Results suggest that return premiums for carry trades are highly associated with parallel yield curve shifts in investment currencies against the US yield curve. Currency portfolios based on cross-country yield curve gap can be profitable, with lowest tercile portfolios yielding sizable risk-adjusted returns adjusted for transaction costs. The authors’ model identifies higher currency carry returns for hedge funds when cross-country yield curves exhibit a wide interest gap over all maturities and finds that investment currency yields have greater curvature relative to funding currency yields. TOPICS: Currency, performance measurement, global markets","PeriodicalId":53711,"journal":{"name":"Journal of Fixed Income","volume":"29 1","pages":"55 - 75"},"PeriodicalIF":0.0000,"publicationDate":"2019-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"2","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Fixed Income","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.3905/jfi.2019.29.1.055","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 2
Abstract
The authors decompose a simple cross-country interest rate differential into three cross-country differential factors, originated from the Nelson–Siegel model. Results suggest that return premiums for carry trades are highly associated with parallel yield curve shifts in investment currencies against the US yield curve. Currency portfolios based on cross-country yield curve gap can be profitable, with lowest tercile portfolios yielding sizable risk-adjusted returns adjusted for transaction costs. The authors’ model identifies higher currency carry returns for hedge funds when cross-country yield curves exhibit a wide interest gap over all maturities and finds that investment currency yields have greater curvature relative to funding currency yields. TOPICS: Currency, performance measurement, global markets
期刊介绍:
The Journal of Fixed Income (JFI) provides sophisticated analytical research and case studies on bond instruments of all types – investment grade, high-yield, municipals, ABSs and MBSs, and structured products like CDOs and credit derivatives. Industry experts offer detailed models and analysis on fixed income structuring, performance tracking, and risk management. JFI keeps you on the front line of fixed income practices by: •Staying current on the cutting edge of fixed income markets •Managing your bond portfolios more efficiently •Evaluating interest rate strategies and manage interest rate risk •Gaining insights into the risk profile of structured products.