The Cost to Carry: Investor Uncertainty and the Currency Risk Premia
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- Master of Science 
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.
Masteroppgave(MSc) in Master of Science in Finance - Handelshøyskolen BI, 2020