Proceedings of 31st International Business Research Conference
27 - 29 July 2015, Ryerson University, Toronto, Canada , ISBN: 978-1-922069-80-1
Ariel Mansura* and Ben Z. Schreiber**
This study investigates the attractiveness of carry trade strategies in the Israeli FX market during the period 1/2003 - 1/2014. We examine several Carry To Risk (CTR) popular measures and propose a new CTR measure which is based on a time-varying currency risk premium using
Kalman filter and Gibbs sampling. In addition we examine the precedence of the examined CTRs to foreigners' holdings in the Israeli government bonds using a proprietary data set. In order to estimate the currency risk premium we also assess the Covered Interest rate Parity (CIP) and the
Uncovered Interest rate Parity (UIP) hypotheses. We find that the CIP hypothesis does not hold during the second half of the sample period while the UIP hypothesis does not hold along the entire sample period except for longer term UIP of twelve month. We find in both OLS regression and causality tests of non-stationary series, that some of the CTRs precede foreigners' positions in government bonds but not the other way around. Such a precedence is of importance to policy makers and investors alike .
Keywords: Risk Premium; Forward Premium Bias; Currency Carry Trade
Track: Finance
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* Bank of Israel, ** (Corresponding author) Bank of Israel and Bar-Ilan University
Dr. Ben Z. Schreiber, E-mail: ben.schreiber58@gmail.com
Mr. Ariel Mansura, E-mail: mansura.ariel@boi.org.il