Downside Market Risk of Carry Trades* | Zendy

Victoria Dobrynskaya | Zendy

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Downside Market Risk of Carry Trades*

Author(s) -

Victoria Dobrynskaya

Publication year - 2014

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1093/rof/rfu004

Subject(s) - downside risk , carry (investment) , economics , financial economics , crash , stock (firearms) , stock market , currency , econometrics , monetary economics , finance , computer science , portfolio , mechanical engineering , paleontology , horse , engineering , biology , programming language

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

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