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Global Risk Co-Moments and Carry Trade Strategy

Mohammadreza Tavakoli Baghdadabad and Girijasankar Mallik
The Journal of Fixed Income Spring 2018, 27 (4) 73-99; DOI: https://doi.org/10.3905/jfi.2018.27.4.073
Mohammadreza Tavakoli Baghdadabad
is a PhD student at the Western Sydney University School of Business in Sydney, Australia
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Girijasankar Mallik
is a senior lecturer at the Western Sydney University School of Business in Sydney, Australia
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Abstract

The authors examine the relation between two global risk factors of co-skewness and co-kurtosis and the cross-section of currency excess returns arising from well-known strategies that borrow in currencies with low interest rates and invest in currencies with high interest rates—so-called carry trades. These global factors are constructed by distinguishing between U.S.-specific and global components of the market return. The authors find that currencies with high interest rates are negatively related to global co-skewness and thus deliver low returns in times of unexpected high global co-skewness, during which time currencies with low interest rates can provide a hedge by yielding positive returns. Their findings show that global co-skewness and co-kurtosis are key drivers of risk premia in exchange markets and are robust to various checks.

TOPICS: Fixed income and structured finance, analysis of individual factors/risk premia, statistical methods

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The Journal of Fixed Income: 27 (4)
The Journal of Fixed Income
Vol. 27, Issue 4
Spring 2018
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Global Risk Co-Moments and Carry Trade Strategy
Mohammadreza Tavakoli Baghdadabad, Girijasankar Mallik
The Journal of Fixed Income Mar 2018, 27 (4) 73-99; DOI: 10.3905/jfi.2018.27.4.073

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Global Risk Co-Moments and Carry Trade Strategy
Mohammadreza Tavakoli Baghdadabad, Girijasankar Mallik
The Journal of Fixed Income Mar 2018, 27 (4) 73-99; DOI: 10.3905/jfi.2018.27.4.073
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  • Article
    • Abstract
    • GLOBAL MARKET CO-MOMENTS
    • ECONOMETRIC MODEL
    • DATA AND CURRENCY PORTFOLIOS
    • EMPIRICAL RESULTS
    • GLOBAL CO-MOMENTS AND LIQUIDITY RISK
    • SUPPLEMENTAL EXPLANATIONS AND ROBUSTNESS CHECKS
    • CONCLUSION
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