Ingomar Krohn (Copenhagen Business School)
15 January 2020 @ 12:00 - 13:15
“Time-Varying Global Dollar Risk in Currency Markets”
Abstract: This paper documents that the price of dollar risk exhibits significant time variation, switching sign after large realized dollar fluctuations, when global dollar demand is high and funding constraints are tight. To exploit this feature of dollar risk, I propose a novel currency investment strategy which is effectively short the dollar in normal states, but long the dollar after large dollar movements. The proposed strategy is not exposed to standard risk factors, yields an annualized return exceeding 4%, and has an annualized Sharpe ratio of 0.34, significantly higher than that of well-known currency strategies. Furthermore, I show that currencies other than the dollar do not exhibit the same sign-switching pattern in their price of risk, consistent with the view that the dollar is special.