Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram
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...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-03-01
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| Series: | Economies |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7099/8/1/18 |
| _version_ | 1811301646130479104 |
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| author | Riza Demirer Rangan Gupta Hossein Hassani Xu Huang |
| author_facet | Riza Demirer Rangan Gupta Hossein Hassani Xu Huang |
| author_sort | Riza Demirer |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-04-13T07:12:44Z |
| format | Article |
| id | doaj.art-a5321a0b771c477c883946a63d0fd62d |
| institution | Directory Open Access Journal |
| issn | 2227-7099 |
| language | English |
| last_indexed | 2024-04-13T07:12:44Z |
| publishDate | 2020-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Economies |
| spelling | doaj.art-a5321a0b771c477c883946a63d0fd62d2022-12-22T02:56:50ZengMDPI AGEconomies2227-70992020-03-01811810.3390/economies8010018economies8010018Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-QuantilogramRiza Demirer0Rangan Gupta1Hossein Hassani2Xu Huang3Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USADepartment of Economics, University of Pretoria, Pretoria, South AfricaResearch Institute of Energy Management and Planning (RIEMP), University of Tehran, Tehran 1417466191, IranFaculty of Business and Law, De Montfort University, Leicester LE1 9BH, UKThis 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.https://www.mdpi.com/2227-7099/8/1/18quantilecorrelogramdependencepredictability |
| spellingShingle | Riza Demirer Rangan Gupta Hossein Hassani Xu Huang Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram Economies quantile correlogram dependence predictability |
| title | Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram |
| title_full | Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram |
| title_fullStr | Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram |
| title_full_unstemmed | Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram |
| title_short | Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram |
| title_sort | time varying risk aversion and the profitability of carry trades evidence from the cross quantilogram |
| topic | quantile correlogram dependence predictability |
| url | https://www.mdpi.com/2227-7099/8/1/18 |
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