Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257067 
Year of Publication: 
2020
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 8 [Issue:] 1 [Article No.:] 18 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-12
Publisher: 
MDPI, Basel
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.
Subjects: 
quantile
correlogram
dependence
predictability
JEL: 
C22
F31
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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