Change search
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
Optimising Emerging Market Currency Carry Trades using Risk Indicators
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.).
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.).
2015 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Optimering av carry-handeln på tillväxtmarknader med riskindikatorer (Swedish)
Abstract [en]

The currency carry trade – whereby one simultaneously borrows in a currency with low interest rate and invests in a currency with high interest rate – is estimated to be at least USD 2.0 trillion in emerging markets alone. By some characterised as “picking up nickels in front of a steam roller”, the carry trade is subject to pronounced periods of disadvantageous currency depreciations. Although the carry trade has been profitable historically, these sudden depreciations at least attenuate, if not completely eradicate returns. The search for yield has led contemporary investors to emerging markets where the volatility is higher, thereby increasing risk and prospective return. The purpose of this thesis is to investigate how quantitative risk indicators can be constructed in order to detect market-reversals, mitigate currency depreciations, and ultimately improve the profitability of the emerging market currency carry trade. For this purpose risk has been categorised into two dichotomous risk classes, global and idiosyncratic; the former referring to systematic, non-country specific risk; the latter to residual, country specific risk. Each risk has been modelled separately. By optimising carry trade return conditioned on a number of distinctive risk measures, attributable to the respective risks, it was concluded that a broad weighted global risk indicator provide substantially augmented risk-adjusted return in an emerging market carry trade, while idiosyncratic indicators might require a bespoke framework for each currency at hand.

Abstract [sv]

Valuta carry-handeln (carry trade) – vari en investerare lånar i en valuta med låga räntor och investerar i en valuta med höga räntor – beräknas omfatta åtminstone två biljoner USD enbart i tillväxtmarknader. Karakteriserat av vissa som att ”plocka upp kronor framför en ångvält” [författarnas översättning], är carry-handeln utsatt för tydliga perioder av ogynnsamma valutadeprecieringar. Trots carry-handelns historiska lönsamhet, dämpar, om inte helt raderar, dessa nedgångar avkastningen. Sökandet efter avkastning har fått investerare att alltmer vända sig till tillväxtmarknader, där volatiliteten är högre och därmed risken samt den förväntade avkastningen. Syftet med denna uppsats är att utforska hur kvantitativa riskindikatorer kan konstrueras för att förekomma marknadsvändningar, dämpa effekten av valutadeprecieringar, och slutligen stärka carry-handels lönsamheten i tillväxtmarknader. I detta syfte har risk kategoriserats i två tudelade riskklasser, global och idiosynkratisk; den förra hänsyftar systematisk, icke-landspecifik risk; den senare osystematisk, landspecifik risk. Vardera risken har modellerats separat. Genom att optimera carry-handelns avkastning villkorat under ett antal distinkta riskmått hänförbara till respektive risk, drogs slutsatsen att en bred, viktad, global riskindikator gav carry-handeln i tillväxtmarknader väsentligt förbättrad riskjusterad avkastning, medan idiosynkratiska riskindikatorer kräver speciellt anpassat tillvägagångssätt för vardera valutan.

Place, publisher, year, edition, pages
2015. , 90 p.
Series
Examensarbete INDEK, 2015:57
Keyword [en]
currency carry trade, emerging markets, risk indicator
Keyword [sv]
valutahandel, tillväxtmarknader, riskindikator
National Category
Mathematical Analysis
Identifiers
URN: urn:nbn:se:kth:diva-171400OAI: oai:DiVA.org:kth-171400DiVA: diva2:843591
Subject / course
Finance
Educational program
Master of Science in Engineering - Industrial Engineering and Management
Supervisors
Examiners
Available from: 2015-08-11 Created: 2015-07-29 Last updated: 2015-08-11Bibliographically approved

Open Access in DiVA

fulltext(1899 kB)214 downloads
File information
File name FULLTEXT01.pdfFile size 1899 kBChecksum SHA-512
754328546b94d624a5c33fafdfcb9aa546cf5fc25e1f46b3bbcbf4f4f72ab47a57c4889994d49fb26d5b64f8f422759f6fb7f7d7f7b57c614a29ea630a0de0c9
Type fulltextMimetype application/pdf

By organisation
Industrial Economics and Management (Dept.)
Mathematical Analysis

Search outside of DiVA

GoogleGoogle Scholar
Total: 214 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

urn-nbn

Altmetric score

urn-nbn
Total: 367 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf