Carry Trade: Beyond the Fama Regression. Richard Clarida Josh Davis Niels Pedersen

Transcription

1 Carry Trade: Beyond he Fama Regression Richard Clarida Josh Davis Niels Pedersen

2 The Agenda Inroduce he carry rade Economics of he carry rade Volailiy and he carry rade Realized Implied Volailiy regimes & Fama regressions Relaion o oher macro facors Conclude For Educaional Purposes Only 2

3 Inroducion Influenial Works Meese and Rogoff (983), Hansen and Hodrick (980) Cumby and Obsfeld (98) Fama (984) Recen Work Burnside, Eichenbaum and Rebelo (2006) Bhansali (2007) Jurek (2008) Brunnermeier, Nagel, Pedersen (2008) For Educaional Purposes Only 3

4 Carry Trade Reurns The reurn is ineres rae differenial ne of FX depreciaion r H L i i x Exchange rae is high yielding currency per uni of low yielding currency Bloomberg Daase: Currency Baskes Ciibank Daase: USD Crosses For Educaional Purposes Only 4

5 Carry index Carry reurn porfolios 300 3v3 G0 3v3exJPY 3v3 exjpy/usd Dae Source: Bloomberg, PIMCO For Educaional Purposes Only 5

6 Summary Saisics Table: Balanced G-0 Carry Trade Sraegy All Currencies Excl. JPY Excl. JPY/USD mean vol m/v mean vol m/v mean vol m/v Time period Baske Noe: m/v is mean reurn divided by volailiy Sample for Illusraive Purposes Only For Educaional Purposes Only 6

7 For Educaional Purposes Only 7 FX Economics FX implies resricions on pricing kernels Simple Affine Kernel Dynamics Dynamics of Exchange Rae f f d d M M X X M M P T db d r M d 2 2 ln P T f d f d f d db d d r r X d ln

8 Z-scores EWMA Volailiy and Carry Reurns 3 2 Realized carry reurn and reurn volailiy(log-inverse) Correlaion is 0.55 Realized reurn Realized reurn volailiy(log-inverse) Dae Source: Bloomberg, PIMCO For Educaional Purposes Only 8

9 EWMA Volailiy and Carry Reurns Table: Balanced G-0 Carry Trade Sraegy in high and low volailiy saes All Currencies Excl. JPY Excl. JPY/USD mean vol m/v mean vol m/v mean vol m/v High Volailiy Sae (above 75h percenile) Baske Low Volailiy Sae (below 25h percenile) Baske Noe: m.v is mean divided by volailiy Sample for Illusraive Purposes Only For Educaional Purposes Only 9

10 Nonparameric Regression For Educaional Purposes Only 0

11 Ciibank Implied Volailiy and Carry Reurns For Educaional Purposes Only

12 For Educaional Purposes Only 2 GARCH Model Due o Nelson (99) Symmeric Model d=0 : posiive/negaive reurns increase condiional volailiy symmerically Asymmeric Model: d<0 : negaive reurns increase condiional volailiy more 2 ln ln h u d h b h u a c h u h h r r

13 GARCH Resuls E-Garch models of carry porfolios Four vs Four Porfolio Japanese Yen vs US dollar coefficien sd.error -sa coefficien sd.error -sa Asymmeric model Consan FVF{} GARCH-V GARCH-V, lagged C A B D Sample for Illusraive Purposes Only For Educaional Purposes Only 3

14 Fama Regression The forward rae as an unbiased predicor of he change in he spo rae: x H L i i Do hese loadings change in differen volailiy environmens? For Educaional Purposes Only 4

15 Fama Regression Table: Fama Regressions for 3v3 baskes of high and low yielding currencies Time period Low Volailiy High Volailiy All Coefficien on forward premium(b) sd. error R-square Noe: Low volailiy saes are below 25h percenile. High volailiy saes above he 75h percenile Sample for Illusraive Purposes Only For Educaional Purposes Only 5

16 Fama Regression Table: Fama regression for FX pairs agains he US Dollar. All Low Volailiy High Volailiy AUD CAD CHF EUR GBP JPY NOK NZD SEK Noe: Table repors coefficien on forward premium and sandard error Sample for Illusraive Purposes Only For Educaional Purposes Only 6

17 Oher Risk Facors Oher deerminans of carry rade reurns Yield Curve Movemens Relaive shifs in he level of curves Relaive shifs in he slopes of curves Crisis vs. Non-crisis periods H L H L lev lev slope slope r Vix 2 3 For Educaional Purposes Only 7

18 Table: Local(fx pair) facors and exchange rae movemens Dependen variable is percenage change in exchange rae ne of carry. Weekly daa. Bond facors and equiy reurns JPYUSD CHFUSD JPYNZD CHFNZD JPYAUD CHFAUD All July 2007-Now VIX(percen) sa Yield Curve Levels sa Yield Curve Slopes sa R-square Non-Crisis Periods VIX(percen) sa Yield Curve Levels sa Yield Curve Slope sa R-square Noe: VIX is percenage change in he US implied volailiy index. 'Yield Curve Levels" and "Yield Curve Slopes" refers o relaive change in levels and slopes in high yield currency counry relaive o low yield currency. Level is defined as he 0 year reasury yield and slope is defined as 0 year minus 2 year reasury yield. Sample for Illusraive Purposes Only For Educaional Purposes Only 8

19 Conclusion Volailiy is a key deerminan of carry rade reurns Realized / implied Fama coefficiens regime dependen Level and slope relaed o currency risk premium For Educaional Purposes Only 9