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

Date

2020-03-05

Advisors

Journal Title

Journal ISSN

ISSN

2227-7099

Volume Title

Publisher

MDPI

Type

Article

Peer reviewed

Yes

Abstract

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.

Description

open access article

Keywords

quantile, correlogram, dependence, predictability

Citation

Demirer, R., Gupta, R., Hassani, H., and Huang, X. (2019) Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram. Economies, 8 (1), 18

Rights

Research Institute

Institute for Applied Economics and Social Value (IAESV)