Understanding the price of volatility risk in carry trades

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

5 Scopus Citations
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Author(s)

  • Shamim Ahmed
  • Giorgio Valente

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)118-129
Journal / PublicationJournal of Banking and Finance
Volume57
Online published9 Apr 2015
Publication statusPublished - Aug 2015

Abstract

This paper investigates the cross-sectional pricing ability of the short- and long-run components of global foreign exchange (FX) volatility for carry trade returns. We find a negative and statistically significant factor risk price for the long-run component, but no significant pricing effect due to the short-run volatility component. We also document that the dynamics of the long-run component of global FX volatility are related to US macroeconomic fundamentals. Our results are robust to various parametrizations of the volatility models used to obtain the volatility components and they are invariant to alternative asset pricing testing methodologies and sample periods.

Research Area(s)

  • Carry trade, Forward premium puzzle, Volatility risk

Citation Format(s)

Understanding the price of volatility risk in carry trades. / Ahmed, Shamim; Valente, Giorgio.

In: Journal of Banking and Finance, Vol. 57, 08.2015, p. 118-129.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review