Can implied volatility predict returns on the currency carry trade?

Egbers, Tom; Swinkels, Laurens

doi:10.1016/j.jbankfin.2015.04.026

Cited by 21 publications

(7 citation statements)

References 36 publications

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“…This undervaluation of high yield currencies or overvaluation of low yield currencies, in turn, leads to large gains in subsequent periods for investors who operate on the expectation of sharp declines in risk. To that end, the findings add support to Egbers and Swinkels (2015) in that measures of investor sentiment (or market risk) could be used as timing indicators to exit and enter the currency carry trade within a conditional trading strategy to improve the profitability of carry trades. 7…”

supporting

confidence: 58%

Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

et al. 2020

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This paper examines the predictive power of time-varying risk aversion over payoffs to the carry trade strategy via the cross-quantilogram methodology. Our analysis yields significant evidence of directional predictability from risk aversion to daily carry trade returns tracked by the Deutsche Bank G10 Currency Future Harvest Total Return Index. The predictive power of risk aversion is found to be stronger during periods of moderate to high risk aversion and largely concentrated on extreme fluctuations in carry trade returns. While large crashes in carry trade returns are associated with significant rises in investors’ risk aversion, we also found that booms in carry trade returns can be predicted at high quantiles of risk aversion. The results highlight the predictive role of extreme investor sentiment in currency markets and regime specific patterns in carry trade returns that can be captured via quantile-based predictive models.

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supporting

confidence: 58%

Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

et al. 2020

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“…Their findings confirm the conclusions of Burnside et al (2007), Barroso and Santa Clara (2015) on the importance of transaction costs for portfolio construction in the FX market. They also confirm the conclusion of Egbers and Swinkels (2015) who do not see implied volatility as a stand alone indicator for currency carry trade in real life decisions.…”

Section: The Information Content Of the Bid-ask Spreadsupporting

confidence: 79%

Attractive and non-attractive currencies

Dupuy

James²,

Marsh

2021

Journal of International Money and Finance

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“…Besides i F −i D and E e t , the variance in the monthly exchange rate of ringgit against the currency of deposit is also computed to capture the element of risk due to the volatility of the exchange rates. The impact of the exchange rate volatility has been extensively studied with relation to trade (Tatliyer and Yigit, 2016;Kim, 2017), foreign exchange liquidity (Ree et al, 2015), currency carry trade (Egbers and Swinkels, 2015), futures market (Gurrib, 2009) and deposits (Martin-Oliver, 2016). Depositors are generally risk-averse as compared to investors in the equity markets.…”

Section: Introductionmentioning

confidence: 99%

Banking on foreign currency accounts: evidence from Malaysia

Ong

2018

IJBM

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Purpose The purpose of this paper is to study how the foreign currency account (FCA) is affected by the domestic fixed deposit (FD) rate, the FCA rate, the expected exchange rate and exchange rate risk. Design/methodology/approach This paper analyses the causal relationship between the domestic FD rate, the FCA rate, the expected exchange rate on a set of foreign currency deposits and exchange rate volatility, based on the theory of portfolio choice. Based on the theory, the panel vector autoregressive regression of fully modified ordinary least squares and dynamic ordinary least squares are modelled. Findings There is no cointegrating relationship for the three-month FCA deposits, the domestic FD rate, the FCA rate and the expected exchange rate. Only the six-month FCA business deposits are affected by the domestic FD rate, the FCA rate and the expected exchange rate. The FCA depositors are not affected by exchange rate volatility. Research limitations/implications This study is conducted based on the FCA rate quoted by the leading commercial banks in Malaysia, Maybank. Thus, the FCA rate is used as a proxy for the FCA rate of commercial banks in Malaysia. Originality/value Individual depositors have to save in more than the three-month FCA to realise their expected return. For individuals, the FCA deposit is not an alternative choice to domestic FD. Exporters may use the FCA deposit to finance their foreign purchases to save the cost of foreign exchange conversion but it is still not an appropriate hedging tool against foreign exchange fluctuations as compared to the existing forward foreign exchange facility.

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Can implied volatility predict returns on the currency carry trade?

Cited by 21 publications

References 36 publications

Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

Attractive and non-attractive currencies

Banking on foreign currency accounts: evidence from Malaysia

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