Salvaging the C-CAPM

Currency Carry Trade Risk Premia and Conditioning Information

Abhay Abhyankar, Angelica Gonzalez, Olga Klinkowska

Research output: Working paper

Abstract

We use a standard consumption-based asset pricing model incorporating conditioning information to explain the risk-return profile of currency carry trade portfolios. We use a scaled stochastic discount factor instead of scaled or managed portfolio returns as in previous work. Our conditioning variable is a forward-looking measure of net foreign assets. It arises from an intertemporal budget constraint and has predictive power for exchange rates. We find that our conditional consumption-CAPM is able to price a large part of the variation in cross-section of carry trade portfolios using cross-sectional as well as time series regression-based tests. Taken together, our results imply that the consumption-based models do still have a role to play in explaining excess returns on carry trade strategies.
Original languageEnglish
PublisherSocial Science Electronic Publishing
Number of pages35
DOIs
Publication statusUnpublished - 14 Sep 2011

Fingerprint

Carry trade
Currency
Risk premia
Conditioning
Consumption-based asset pricing
Exchange rates
Capital asset pricing model
Asset pricing models
Net foreign assets
Cross section
Stochastic discount factor
Excess returns
Predictive power
Intertemporal budget constraint
Risk-return

Keywords

  • consumption CAPM
  • Fama-MacBeth Regressions
  • net foreign assets
  • conditioning information
  • conditional asset pricing models

Cite this

Abhyankar, A., Gonzalez, A., & Klinkowska, O. (2011). Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information. Social Science Electronic Publishing. https://doi.org/10.2139/ssrn.1927265

Salvaging the C-CAPM : Currency Carry Trade Risk Premia and Conditioning Information. / Abhyankar, Abhay; Gonzalez, Angelica; Klinkowska, Olga.

Social Science Electronic Publishing, 2011.

Research output: Working paper

Abhyankar, A, Gonzalez, A & Klinkowska, O 2011 'Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information' Social Science Electronic Publishing. https://doi.org/10.2139/ssrn.1927265
Abhyankar A, Gonzalez A, Klinkowska O. Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information. Social Science Electronic Publishing. 2011 Sep 14. https://doi.org/10.2139/ssrn.1927265
Abhyankar, Abhay ; Gonzalez, Angelica ; Klinkowska, Olga. / Salvaging the C-CAPM : Currency Carry Trade Risk Premia and Conditioning Information. Social Science Electronic Publishing, 2011.
@techreport{25f256c7d9784e3696936a9e12f31545,
title = "Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information",
abstract = "We use a standard consumption-based asset pricing model incorporating conditioning information to explain the risk-return profile of currency carry trade portfolios. We use a scaled stochastic discount factor instead of scaled or managed portfolio returns as in previous work. Our conditioning variable is a forward-looking measure of net foreign assets. It arises from an intertemporal budget constraint and has predictive power for exchange rates. We find that our conditional consumption-CAPM is able to price a large part of the variation in cross-section of carry trade portfolios using cross-sectional as well as time series regression-based tests. Taken together, our results imply that the consumption-based models do still have a role to play in explaining excess returns on carry trade strategies.",
keywords = "consumption CAPM, Fama-MacBeth Regressions, net foreign assets, conditioning information, conditional asset pricing models",
author = "Abhay Abhyankar and Angelica Gonzalez and Olga Klinkowska",
year = "2011",
month = "9",
day = "14",
doi = "10.2139/ssrn.1927265",
language = "English",
publisher = "Social Science Electronic Publishing",
type = "WorkingPaper",
institution = "Social Science Electronic Publishing",

}

TY - UNPB

T1 - Salvaging the C-CAPM

T2 - Currency Carry Trade Risk Premia and Conditioning Information

AU - Abhyankar, Abhay

AU - Gonzalez, Angelica

AU - Klinkowska, Olga

PY - 2011/9/14

Y1 - 2011/9/14

N2 - We use a standard consumption-based asset pricing model incorporating conditioning information to explain the risk-return profile of currency carry trade portfolios. We use a scaled stochastic discount factor instead of scaled or managed portfolio returns as in previous work. Our conditioning variable is a forward-looking measure of net foreign assets. It arises from an intertemporal budget constraint and has predictive power for exchange rates. We find that our conditional consumption-CAPM is able to price a large part of the variation in cross-section of carry trade portfolios using cross-sectional as well as time series regression-based tests. Taken together, our results imply that the consumption-based models do still have a role to play in explaining excess returns on carry trade strategies.

AB - We use a standard consumption-based asset pricing model incorporating conditioning information to explain the risk-return profile of currency carry trade portfolios. We use a scaled stochastic discount factor instead of scaled or managed portfolio returns as in previous work. Our conditioning variable is a forward-looking measure of net foreign assets. It arises from an intertemporal budget constraint and has predictive power for exchange rates. We find that our conditional consumption-CAPM is able to price a large part of the variation in cross-section of carry trade portfolios using cross-sectional as well as time series regression-based tests. Taken together, our results imply that the consumption-based models do still have a role to play in explaining excess returns on carry trade strategies.

KW - consumption CAPM

KW - Fama-MacBeth Regressions

KW - net foreign assets

KW - conditioning information

KW - conditional asset pricing models

U2 - 10.2139/ssrn.1927265

DO - 10.2139/ssrn.1927265

M3 - Working paper

BT - Salvaging the C-CAPM

PB - Social Science Electronic Publishing

ER -