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Understanding the price of volatility risk in carry trades

Ahmed, Shamim; Valente, Giorgio

Authors

Shamim Ahmed

Giorgio Valente



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.

Citation

Ahmed, S., & Valente, G. (2015). Understanding the price of volatility risk in carry trades. Journal of Banking and Finance, 57, https://doi.org/10.1016/j.jbankfin.2015.04.002

Journal Article Type Article
Acceptance Date Apr 3, 2015
Online Publication Date Apr 9, 2015
Publication Date Aug 1, 2015
Deposit Date Sep 19, 2016
Publicly Available Date Sep 19, 2016
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Electronic ISSN 1872-6372
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 57
DOI https://doi.org/10.1016/j.jbankfin.2015.04.002
Keywords Carry trade; Forward premium puzzle; Volatility risk
Public URL http://eprints.nottingham.ac.uk/id/eprint/36952
Publisher URL http://www.sciencedirect.com/science/article/pii/S0378426615000783
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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