#5 – FX Carry Trade
Hafez, Xie: The Term Structure of Currency Carry Trade Risk Premia
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340547
Abstract:
Investors earn a large carry trade premium by taking long positions in short-term bills issued by countries with high interest rates, funded by short positions in bills issued by countries with low interest rates. We find that the returns to these carry trades disappear as the maturity of the foreign bonds increases. The high-yielding carry trade currencies, whose exchange rates earn a high currency risk premium, have flat yield curves and correspondingly small local term premiums in bond markets. No arbitrage implies that the short-term foreign bond risk premiums are high in the high-yielding countries when there is less overall risk in their pricing kernels than at home. The long-term foreign bond risk premiums are high only when there is less permanent risk in those high-yielding foreign countries' pricing kernels than at home. Our findings imply that the currency carry trade premium in short-term bills compensates investors for exposure to global risk of a transitory nature. The bulk of risk borne by currency investors is less persistent than the overall risks borne by stock investors, because there is more cross-border sharing of permanent risks.
#5 – FX Carry Trade
#129 – Dollar Carry Trade
Hassan, Mano: Forward and Spot Exchange Rates in a Multi-Currency World
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272893
Abstract:
We decompose the covariance of currency returns with forward premia into a cross-currency, a between-time-and-currency, and a cross-time component. The surprising result of our decomposition is that the cross-currency and cross-time-components account for almost all systematic variation in expected currency returns, while the between-time-and-currency component is statistically and economically insignificant. This finding has three surprising implications for models of currency risk premia. First, it shows that the two most famous anomalies in international currency markets, the carry trade and the Forward Premium Puzzle (FPP), are separate phenomena that may require separate explanations. The carry trade is driven by persistent differences in currency risk premia across countries, while the FPP appears to be driven primarily by time-series variation in all currency risk premia against the US dollar. Second, it shows that both the carry trade and the FPP are puzzles about asymmetries in the risk characteristics of countries. The carry trade results from persistent differences in the risk characteristics of individual countries; the FPP is best explained by time variation in the average return of all currencies against the US dollar. As a result, existing models in which two symmetric countries interact in financial markets cannot explain either of the two anomalies.
#5 – FX Carry Trade
#129 – Dollar Carry Trade
Jurek, Xu: Option-Implied Currency Risk Premia
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2338585
Abstract:
We use cross-sectional information on the prices of G10 currency options to calibrate a non-Gaussian model of pricing kernel dynamics and construct estimates of conditional currency risk premia. We find that the mean historical returns to short dollar and carry factors (HML-FX) are statistically indistinguishable from their option-implied counterparts, which are free from peso problems. Skewness and higher-order moments of the pricing kernel innovations on average account for only 15% of the HML-FX risk premium in G10 currencies. These results are consistent with the observation that crash-hedged currency carry trades continue to deliver positive excess returns.
#14 – Momentum Effect in Stocks
Cheema: Three Essays on Momentum Returns
https://researcharchive.lincoln.ac.nz/bitstream/10182/5667/3/cheema_phd.pdf
Abstract:
This dissertation consists of three essays on momentum returns. The first essay is entitled ‘Momentum Returns, Market States and the Global Financial Crisis’. This essay investigates the profitability of the momentum trading strategy in the stock exchanges of Shanghai, Shenzhen and Hong Kong over the period 1994 to 2010. In the second essay, entitled ‘Momentum Returns and Information Uncertainty’, I study the impact of information uncertainty on the profitability of the momentum trading strategy. In the third and final essay, entitled ‘Momentum Returns, Long-Term Reversal and Idiosyncratic Volatility’, I study the impact of idiosyncratic volatility (IV) on the profitability of momentum and long-term reversal trading strategies in China over the period 1994 to 2010.
#118 – Time Series Momentum Effect
Zhou, Zhu: An Equilibrium Model of Moving-Average Predictability and Time-Series Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326650
Abstract:
In an equilibrium model with rational informed investors and technical investors, we show that the moving average of past market prices can forecast the future price, explaining the strong predictive power found in many empirical studies. Our model can also explain the time series momentum that the market prices tend to be positively correlated in the short-run and negatively correlated in the long-run.
