Understanding the price of volatility risk in carry trades

Ahmed, Shamim and Valente, Giorgio (2015) Understanding the price of volatility risk in carry trades. Journal of Banking and Finance, 57 . pp. 118-129. ISSN 1872-6372

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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.

Item Type: Article
Keywords: Carry trade; Forward premium puzzle; Volatility risk
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Identification Number: https://doi.org/10.1016/j.jbankfin.2015.04.002
Depositing User: Fuller, Stella
Date Deposited: 19 Sep 2016 07:23
Last Modified: 16 Oct 2017 09:15
URI: http://eprints.nottingham.ac.uk/id/eprint/36952

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