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Gareth W. Peters - One of the best experts on this subject based on the ideXlab platform.

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    Journal of International Money and Finance, 2017
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    Abstract The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.

  • An Online Appendix to: 'Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences'
    SSRN Electronic Journal, 2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    This online appendix to "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" includes the copula density function for the Clayton-Frank-Gumbel mixture copula and the details for the likelihood based estimation of the multivariate currency basket log returns. Currency carry trade high and low Interest Rate baskets over time are shown. Further results for the copula parameter fits and associated dependence measures are then analysed. A description of the method used to calculate the confidence intervals for the covariance regression is given. Finally, the method used to interpolate the one month forward price curve is explained.The paper "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2638163

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2638103

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Research Papers in Economics, 2014
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from such Interest Rate differentials. The two primary assumptions required for Interest Rate Parity are related to capital mobility and perfect substitutability of domestic and foreign assets. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn arbitrage profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features in the analysis of the risk-reward for the currency portfolios with high Interest Rate differentials and low Interest Rate differentials.

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Social Science Research Network, 2013
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from the Interest Rate differentials. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features. We analyse the returns of currency carry trade portfolios adjusting for tail dependence risk. To achieve this analysis of the multivariate extreme tail dependence we develop several parametric models and perform detailed model comparison. It is thus demonstRated that tail dependencies among specific sets of currencies provide other justifications to the carry trade excess return and also allow us to detect construction and unwinding periods of such carry portfolios.

William T Ziemba - One of the best experts on this subject based on the ideXlab platform.

  • currency regimes and weak Interest Rate Parity
    Social Science Research Network, 2010
    Co-Authors: Leonard C Maclean, Yonggan Zhao, William T Ziemba
    Abstract:

    We consider the presence of regimes in currency markets and their implications for Interest Rate Parity. A weak form of Interest Rate Parity is postulated and tested which assumes that the hedged risk premiums are identical within each regime across currencies. Both the in-sample (January 2002 - December 2004) and the out-of-sample (January 2005 - December 2007) daily data support weak Interest Rate Parity. Furthermore, using the Federal Exchange Rate Index as a proxy of the currency market portfolio and T-Bills as the risk free asset, we find strong evidence that the weak Interest Rate Parity hypothesis is consistent with standard portfolio equilibrium theory. The similarity between the benchmark and the implied equilibrium portfolio provides strong evidence that regime switching with weak Interest Rate Parity is appropriate for modeling currency returns.

  • weak Interest Rate Parity and currency portfolio diversification
    Social Science Research Network, 2006
    Co-Authors: Leonard C Maclean, Yonggan Zhao, William T Ziemba
    Abstract:

    This paper presents a dynamic model of optimal currency returns with a hidden Markov regime switching process. We postulate a weak form of Interest Rate Parity that the hedged risk premiums on currency investments are identical within each regime across all currencies. Both the in-sample and the out-of-sample data during January 2002 - March 2005 strongly support this hypothesis. Observing past asset returns, investors infer the prevailing regime of the economy and determine the most likely future direction to facilitate portfolio decisions. Using standard mean variance analysis, we find that an optimal portfolio resembles the Federal Exchange Rate Index which characterizes the strength of the U.S. dollar against world major currencies. The similarity provides a strong implication that our three-regime switching modelis appropriate for modeling the hedged returns in excess of the U.S. risk free Interest Rate. To investigate the impact of the equity market performance on changes of exchange Rates, we include the S&P500 index return as an exogenous factor for parameter estimation.

Matthew Ames - One of the best experts on this subject based on the ideXlab platform.

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    Journal of International Money and Finance, 2017
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    Abstract The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.

  • An Online Appendix to: 'Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences'
    SSRN Electronic Journal, 2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    This online appendix to "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" includes the copula density function for the Clayton-Frank-Gumbel mixture copula and the details for the likelihood based estimation of the multivariate currency basket log returns. Currency carry trade high and low Interest Rate baskets over time are shown. Further results for the copula parameter fits and associated dependence measures are then analysed. A description of the method used to calculate the confidence intervals for the covariance regression is given. Finally, the method used to interpolate the one month forward price curve is explained.The paper "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2638163

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2638103

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Research Papers in Economics, 2014
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from such Interest Rate differentials. The two primary assumptions required for Interest Rate Parity are related to capital mobility and perfect substitutability of domestic and foreign assets. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn arbitrage profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features in the analysis of the risk-reward for the currency portfolios with high Interest Rate differentials and low Interest Rate differentials.

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Social Science Research Network, 2013
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from the Interest Rate differentials. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features. We analyse the returns of currency carry trade portfolios adjusting for tail dependence risk. To achieve this analysis of the multivariate extreme tail dependence we develop several parametric models and perform detailed model comparison. It is thus demonstRated that tail dependencies among specific sets of currencies provide other justifications to the carry trade excess return and also allow us to detect construction and unwinding periods of such carry portfolios.

Guillaume Bagnarosa - One of the best experts on this subject based on the ideXlab platform.

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    Journal of International Money and Finance, 2017
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    Abstract The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.

  • An Online Appendix to: 'Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences'
    SSRN Electronic Journal, 2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    This online appendix to "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" includes the copula density function for the Clayton-Frank-Gumbel mixture copula and the details for the likelihood based estimation of the multivariate currency basket log returns. Currency carry trade high and low Interest Rate baskets over time are shown. Further results for the copula parameter fits and associated dependence measures are then analysed. A description of the method used to calculate the confidence intervals for the covariance regression is given. Finally, the method used to interpolate the one month forward price curve is explained.The paper "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2638163

  • violations of uncovered Interest Rate Parity and international exchange Rate dependences
    2015
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The uncovered Interest Rate Parity puzzle questions the economic relation existing between short term Interest Rate differentials and exchange Rates. One would indeed expect that the differential of Interest Rates between two countries should be offset by an opposite evolution of the exchange Rate between them, hence ruling out any limited risk profit opportunities. However, it has been shown empirically that this relation is not holding and accordingly has led, over the past two decades, to the reinforcement of a well-known trading stRategy in financial markets, namely the currency carry trade. This paper investigates how highly leveraged, mass speculator behaviour affects the dependence structure of currency returns. We propose a rigorous statistical modelling approach using two complementary techniques in order to demonstRate that speculative carry trade volumes are informative in both the covariance and tail dependence of high and low Interest Rate currency returns, whereas the price based factors previously suggested in the literature hold little explanatory power. We add a new feature to the understanding of the link between the UIP condition and the carry trade stRategy, specifically attributed to the large joint exchange Rate movements in high and low risk environments.The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2638103

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Research Papers in Economics, 2014
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from such Interest Rate differentials. The two primary assumptions required for Interest Rate Parity are related to capital mobility and perfect substitutability of domestic and foreign assets. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn arbitrage profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features in the analysis of the risk-reward for the currency portfolios with high Interest Rate differentials and low Interest Rate differentials.

  • reinvestigating the uncovered Interest Rate Parity puzzle via analysis of multivariate tail dependence in currency carry trades
    Social Science Research Network, 2013
    Co-Authors: Matthew Ames, Guillaume Bagnarosa, Gareth W. Peters
    Abstract:

    The currency carry trade is the investment stRategy that involves selling low Interest Rate currencies in order to purchase higher Interest Rate currencies, thus profiting from the Interest Rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such stRategies. That is uncovered Interest Rate Parity (UIP), the Parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange Rates, should result in an outcome that changes in the exchange Rate should offset the potential to profit from the Interest Rate differentials. Given foreign exchange market equilibrium, the Interest Rate Parity condition implies that the expected return on domestic assets will equal the exchange Rate-adjusted expected return on foreign currency assets. However, it has been shown empirically, that investors can actually earn profits by borrowing in a country with a lower Interest Rate, exchanging for foreign currency, and investing in a foreign country with a higher Interest Rate, whilst allowing for any losses (or gains) from exchanging back to their domestic currency at maturity. Therefore trading stRategies that aim to exploit the Interest Rate differentials can be profitable on average. The intention of this paper is therefore to reinterpret the currency carry trade puzzle in light of heavy tailed marginal models coupled with multivariate tail dependence features. We analyse the returns of currency carry trade portfolios adjusting for tail dependence risk. To achieve this analysis of the multivariate extreme tail dependence we develop several parametric models and perform detailed model comparison. It is thus demonstRated that tail dependencies among specific sets of currencies provide other justifications to the carry trade excess return and also allow us to detect construction and unwinding periods of such carry portfolios.

Alexandros Kontonikas - One of the best experts on this subject based on the ideXlab platform.

  • a new test of the real Interest Rate Parity hypothesis bounds approach and structural breaks
    Review of International Economics, 2011
    Co-Authors: George Bagdatoglou, Alexandros Kontonikas
    Abstract:

    We test the real Interest Rate Parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real Interest Rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real Interest Rate Parity has not fully recovered from a breakdown in the 1980s.

  • a new test of the real Interest Rate Parity hypothesis bounds approach and structural breaks
    Review of International Economics, 2011
    Co-Authors: George Bagdatoglou, Alexandros Kontonikas
    Abstract:

    The real Interest Rate Parity hypothesis is tested using data for the group of seven industrialized countries (G7) over the period 1970–2008. The contribution is two-fold. First, the paper utilizes the bounds approach in order to overcome uncertainty about the order of integration of real Interest Rates. Second, a test is made for structural breaks in the underlying relationship using a multiple structural breaks test. The results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real Interest Rate Parity has not fully recovered from a breakdown in the 1980s.