CURRENCY CARRY TRADE AND EXCHANGE RATE VOLATILITYEVIDENCE FROM ASEAN+3 and G10

Abstract

The purpose of this paper is to find various risk factors that affect currency carry trade return in interested groups of ASEAN+3 and G10 country during the period of 2001Q1 and 2014Q1. This study has two objectives. The first objective of this paper is to analyze the effects of exchange rate volatility on the carry trade return. The second objectives is to see whether yield curve level factors and yield curve slope factors affect carry trade return. This paper follows Clarida, Davis, and Pederson’s model in 2009. I find that carry return and exchange rate volatility are negatively related or this can be implied that return on carry trade strategy will be higher in low volatility environment. The results for the second objective show that yield curve level factors positively affect carry trade return while yield curve slopes factors are negatively correlated with carry return. Additionally, this study find that investing in the merged groups of ASEAN+3 and G10 yields better carry trade returns comparing to in separated group of only ASEAN+3 or G10.