[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/80789.html
   My bibliography  Save this paper

Carry Trades and Commodity Risk Factors

Author

Listed:
  • Byrne, Joseph P
  • Ibrahim, Boulis Maher
  • Sakemoto, Ryuta
Abstract
This paper investigates the importance of commodity prices to the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock.

Suggested Citation

  • Byrne, Joseph P & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2017. "Carry Trades and Commodity Risk Factors," MPRA Paper 80789, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80789
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/80789/1/MPRA_paper_80789.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert Ready & Nikolai Roussanov & Colin Ward, 2017. "Commodity Trade and the Carry Trade: A Tale of Two Countries," Journal of Finance, American Finance Association, vol. 72(6), pages 2629-2684, December.
    2. Filippou, Ilias & Taylor, Mark P., 2017. "Common Macro Factors and Currency Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1731-1763, August.
    3. Atanasov, Victoria & Nitschka, Thomas, 2015. "Foreign Currency Returns and Systematic Risks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(1-2), pages 231-250, April.
    4. Bodart, V. & Candelon, B. & Carpantier, J.-F., 2012. "Real exchanges rates in commodity producing countries: A reappraisal," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1482-1502.
    5. Yu-Chin Chen & Kenneth S. Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 1145-1194.
    6. Victoria Dobrynskaya, 2014. "Downside Market Risk of Carry Trades," Review of Finance, European Finance Association, vol. 18(5), pages 1885-1913.
    7. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    8. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
    9. Ludvigson, Sydney C. & Ng, Serena, 2007. "The empirical risk-return relation: A factor analysis approach," Journal of Financial Economics, Elsevier, vol. 83(1), pages 171-222, January.
    10. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    11. Darvas, Zsolt, 2009. "Leveraged carry trade portfolios," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 944-957, May.
    12. Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
    13. Yin, Libo & Han, Liyan, 2015. "Co-movements in commodity prices: Global, sectoral and commodity-specific factors," Economics Letters, Elsevier, vol. 126(C), pages 96-100.
    14. Martin Eichenbaum & Craig Burnside & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," American Economic Review, American Economic Association, vol. 97(2), pages 333-338, May.
    15. Adrien Verdelhan, 2018. "The Share of Systematic Variation in Bilateral Exchange Rates," Journal of Finance, American Finance Association, vol. 73(1), pages 375-418, February.
    16. Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, vol. 88(1), pages 74-90.
    17. M. Ayhan Kose & Christopher Otrok & Eswar Prasad, 2012. "Global Business Cycles: Convergence Or Decoupling?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 511-538, May.
    18. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
    19. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2013. "Primary commodity prices: Co-movements, common factors and fundamentals," Journal of Development Economics, Elsevier, vol. 101(C), pages 16-26.
    20. Charles Engel & Nelson C. Mark & Kenneth D. West, 2015. "Factor Model Forecasts of Exchange Rates," Econometric Reviews, Taylor & Francis Journals, vol. 34(1-2), pages 32-55, February.
    21. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
    22. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    23. Alquist, Ron & Bhattarai, Saroj & Coibion, Olivier, 2020. "Commodity-price comovement and global economic activity," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 41-56.
    24. Cenedese, Gino & Sarno, Lucio & Tsiakas, Ilias, 2014. "Foreign exchange risk and the predictability of carry trade returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 302-313.
    25. Stephen Gilmore & Fumio Hayashi, 2011. "Emerging Market Currency Excess Returns," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 85-111, October.
    26. Chen, Yu-chin & Turnovsky, Stephen J. & Zivot, Eric, 2014. "Forecasting inflation using commodity price aggregates," Journal of Econometrics, Elsevier, vol. 183(1), pages 117-134.
    27. Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2012. "Carry Trades and Global Foreign Exchange Volatility," Journal of Finance, American Finance Association, vol. 67(2), pages 681-718, April.
    28. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    29. Craig Burnside, 2011. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk: Comment," American Economic Review, American Economic Association, vol. 101(7), pages 3456-3476, December.
    30. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    31. West, Kenneth D. & Wong, Ka-Fu, 2014. "A factor model for co-movements of commodity prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 289-309.
    32. Lucio Sarno & Maik Schmeling, 2014. "Which Fundamentals Drive Exchange Rates? A Cross‐Sectional Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 267-292, March.
    33. Hanno Lustig & Adrien Verdelhan, 2011. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply," American Economic Review, American Economic Association, vol. 101(7), pages 3477-3500, December.
    34. Grilli, Enzo R & Yang, Maw Cheng, 1988. "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," The World Bank Economic Review, World Bank, vol. 2(1), pages 1-47, January.
    35. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    36. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    37. repec:dau:papers:123456789/15216 is not listed on IDEAS
    38. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    39. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    40. Ahmed, Shamim & Valente, Giorgio, 2015. "Understanding the price of volatility risk in carry trades," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 118-129.
    41. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    42. Evgenia Passari, 2015. "Commodity Currencies Revisited," Post-Print hal-01453266, HAL.
    43. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    44. Bakshi, Gurdip & Panayotov, George, 2013. "Predictability of currency carry trades and asset pricing implications," Journal of Financial Economics, Elsevier, vol. 110(1), pages 139-163.
    45. repec:bla:jfinan:v:53:y:1998:i:4:p:1285-1309 is not listed on IDEAS
    46. repec:bla:jfinan:v:43:y:1988:i:5:p:1075-93 is not listed on IDEAS
    47. Habib, Maurizio M. & Stracca, Livio, 2012. "Getting beyond carry trade: What makes a safe haven currency?," Journal of International Economics, Elsevier, vol. 87(1), pages 50-64.
    48. Jylhä, Petri & Suominen, Matti, 2011. "Speculative capital and currency carry trades," Journal of Financial Economics, Elsevier, vol. 99(1), pages 60-75, January.
    49. Nikolay Gospodinov & Serena Ng, 2013. "Commodity Prices, Convenience Yields, and Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 206-219, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Byrne, Joseph P. & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2022. "The time-varying risk price of currency portfolios," Journal of International Money and Finance, Elsevier, vol. 124(C).
    2. Allayioti, Anastasia & Venditti, Fabrizio, 2024. "The role of comovement and time-varying dynamics in forecasting commodity prices," Working Paper Series 2901, European Central Bank.
    3. Bondatti, Massimiliano & Rillo, Giovanni, 2022. "Commodity tail-risk and exchange rates," Finance Research Letters, Elsevier, vol. 47(PA).
    4. Fry-McKibbin, Renée & McKinnon, Kate, 2023. "The evolution of commodity market financialization: Implications for portfolio diversification," Journal of Commodity Markets, Elsevier, vol. 32(C).
    5. Su, Zhi & Mo, Xuan & Yin, Libo, 2021. "Oil market uncertainty and excess returns on currency carry trade," Research in International Business and Finance, Elsevier, vol. 56(C).
    6. Byrne, Joseph P. & Sakemoto, Ryuta, 2021. "The conditional volatility premium on currency portfolios," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    7. Joseph, Byrne & Sakemoto, Ryuta, 2020. "The Conditional Risk and Return Trade-Off on Currency Portfolios," MPRA Paper 99497, University Library of Munich, Germany.
    8. Wang, Wenhao & Cheung, Yin-Wong, 2023. "Commodity price effects on currencies," Journal of International Money and Finance, Elsevier, vol. 130(C).
    9. Qian Zhang & Kuo-Jui Wu & Ming-Lang Tseng, 2019. "Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method," Sustainability, MDPI, vol. 11(12), pages 1-26, June.
    10. Wei, Yanfeng & Qiu, Feng & An, Henry & Zhang, Xindon & Li, Changhong & Guo, Xiaoying, 2024. "Exogenous oil supply shocks and global agricultural commodity prices: The role of biofuels," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 394-414.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Byrne, Joseph P. & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2018. "Common information in carry trade risk factors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 37-47.
    2. Byrne, Joseph P. & Sakemoto, Ryuta, 2021. "The conditional volatility premium on currency portfolios," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    3. Opie, Wei & Riddiough, Steven J., 2020. "Global currency hedging with common risk factors," Journal of Financial Economics, Elsevier, vol. 136(3), pages 780-805.
    4. Byrne, Joseph P. & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2022. "The time-varying risk price of currency portfolios," Journal of International Money and Finance, Elsevier, vol. 124(C).
    5. Jamali, Ibrahim & Yamani, Ehab & Smallwood, Aaron D., 2023. "An investment-based explanation of currency excess returns," Journal of International Money and Finance, Elsevier, vol. 133(C).
    6. Byrne, Joseph P & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2017. "The Time-Varying Risk Price of Currency Carry Trades," MPRA Paper 80788, University Library of Munich, Germany.
    7. Colacito, Riccardo & Riddiough, Steven J. & Sarno, Lucio, 2020. "Business cycles and currency returns," Journal of Financial Economics, Elsevier, vol. 137(3), pages 659-678.
    8. Joseph, Byrne & Sakemoto, Ryuta, 2020. "The Conditional Risk and Return Trade-Off on Currency Portfolios," MPRA Paper 99497, University Library of Munich, Germany.
    9. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
    10. Huang, Huichou & MacDonald, Ronald & Zhao, Yang, 2012. "Global Currency Misalignments, Crash Sensitivity, and Downside Insurance Costs," MPRA Paper 53745, University Library of Munich, Germany, revised 18 Nov 2013.
    11. Fan, Zhenzhen & Londono, Juan M. & Xiao, Xiao, 2022. "Equity tail risk and currency risk premiums," Journal of Financial Economics, Elsevier, vol. 143(1), pages 484-503.
    12. Yung, Julieta, 2021. "Can interest rate factors explain exchange rate fluctuations?," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 34-56.
    13. Sakemoto, Ryuta, 2019. "Currency carry trades and the conditional factor model," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 198-208.
    14. Thomas A. Maurer & Thuy-Duong Tô & Ngoc-Khanh Tran, 2019. "Pricing Risks Across Currency Denominations," Management Science, INFORMS, vol. 65(11), pages 5308-5336, November.
    15. Ivanova, Yuliya & Neely, Christopher J. & Weller, Paul & Famiglietti, Matthew T., 2021. "Can risk explain the profitability of technical trading in currency markets?," Journal of International Money and Finance, Elsevier, vol. 110(C).
    16. Liu, Xi & Zhang, Xueyong, 2024. "Geopolitical risk and currency returns," Journal of Banking & Finance, Elsevier, vol. 161(C).
    17. Dupuy, Philippe & James, Jessica & Marsh, Ian W., 2021. "Attractive and non-attractive currencies," Journal of International Money and Finance, Elsevier, vol. 110(C).
    18. Filippou, Ilias & Taylor, Mark P., 2023. "Forward-Looking Policy Rules and Currency Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(1), pages 449-483, February.
    19. Mueller, Philippe & Stathopoulos, Andreas & Vedolin, Andrea, 2017. "International correlation risk," Journal of Financial Economics, Elsevier, vol. 126(2), pages 270-299.
    20. Gordon Schulze, 2021. "Carry Trade Returns and Segmented Risk Pricing," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(1), pages 23-40, March.

    More about this item

    Keywords

    Currency Carry Trade; Commodity price; Factor Model; Hierarchical Model; Emerging Currencies;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:80789. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.