Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Business Administration

First Advisor's Name

Krishnan Dandapani

First Advisor's Committee Title

committee chair

Second Advisor's Name

Edward Lawrence

Second Advisor's Committee Title

committee member

Third Advisor's Name

Weidong Xia

Third Advisor's Committee Title

committee member

Fourth Advisor's Name

Zhonghua Wu

Fourth Advisor's Committee Title

committee member

Keywords

carry trade, currency risk, variance risk premia, risk premia, volatility risk, predictive, global systematic risk

Date of Defense

6-22-2018

Abstract

I propose a global risk factor – Currency Traded Risk (CTR). This risk factor is the first to identify the directional link between currencies and equities. CTR captures the genesis of financial globalization, and contains the greatest predictive ability to date for monthly returns on a global stock portfolio.

Theoretically, return expectation is intimately linked to time-varying risk premia. Due to the intrinsic scope of currency values in integrating the world’s financial markets, information on time-varying risk premia prices into currencies at greater speed, scale, and global consensus, relative other asset classes. High interest rate currencies proxy as a risk-on asset class. Low interest rate currencies proxy as a risk-off asset class. Innovations in these currencies’ values summarize global risk premia and forecast equity market returns.

CTR measures two sources of global risk premia; the difference between averaged spot returns of high interest rate currencies and low interest rate currencies, and the difference between implied and realized volatility of high interest rate currencies. Using recursive regressions, CTR predicts monthly MSCI World Index© returns out of sample, with R2’s consistent at 10% from 2008 to 2017. Currencies track global risk premia, whereas equities respond to it.

Identifier

FIDC006856

Available for download on Thursday, June 18, 2020

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