Understanding the price of volatility risk in carry trades
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 t...
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| Format: | Article |
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Elsevier
2015
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| Online Access: | https://eprints.nottingham.ac.uk/36952/ |
| _version_ | 1848795364896800768 |
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| author | Ahmed, Shamim Valente, Giorgio |
| author_facet | Ahmed, Shamim Valente, Giorgio |
| author_sort | Ahmed, Shamim |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T19:30:55Z |
| format | Article |
| id | nottingham-36952 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:30:55Z |
| publishDate | 2015 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-369522020-05-04T20:07:43Z https://eprints.nottingham.ac.uk/36952/ Understanding the price of volatility risk in carry trades Ahmed, Shamim Valente, Giorgio 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. Elsevier 2015-08 Article PeerReviewed 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 Carry trade; Forward premium puzzle; Volatility risk http://www.sciencedirect.com/science/article/pii/S0378426615000783 doi:10.1016/j.jbankfin.2015.04.002 doi:10.1016/j.jbankfin.2015.04.002 |
| spellingShingle | Carry trade; Forward premium puzzle; Volatility risk Ahmed, Shamim Valente, Giorgio Understanding the price of volatility risk in carry trades |
| title | Understanding the price of volatility risk in carry trades |
| title_full | Understanding the price of volatility risk in carry trades |
| title_fullStr | Understanding the price of volatility risk in carry trades |
| title_full_unstemmed | Understanding the price of volatility risk in carry trades |
| title_short | Understanding the price of volatility risk in carry trades |
| title_sort | understanding the price of volatility risk in carry trades |
| topic | Carry trade; Forward premium puzzle; Volatility risk |
| url | https://eprints.nottingham.ac.uk/36952/ https://eprints.nottingham.ac.uk/36952/ https://eprints.nottingham.ac.uk/36952/ |