The Cost to Carry: Investor Uncertainty and the Currency Risk Premia
Master thesis

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Date
2020Metadata
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- Master of Science [1822]
Abstract
This thesis explores a risk-based explanation of carry trade returns in currency
markets. We propose a two-factor model that uses investor uncertainty proxied by
News Implied Volatility innovations (NVIX) and the dollar factor to explain the
profitability of the carry trade strategy. This model explains 86% of the variation in
currency returns. The NVIX innovations factor commands a negative risk premium
of 12.9% per annum. In addition, we use NVIX’s forecasting ability in carry trade
returns to hedge the downside risk and improve the profitability of the carry trade
strategy.
Description
Masteroppgave(MSc) in Master of Science in Finance - Handelshøyskolen BI, 2020