CEPII, Recherche et Expertise sur l'economie mondiale
Looking at the Other Side of Carry Trades: Are there any Safe Haven Currencies?

Virginie Coudert
Cyriac Guillaumin
Hélène Raymond

 Highlights :
  • Safe haven currencies are able to yield positive excess returns during crises, despite negative ones on the long-run.
  • When considering a sample of 26 currencies from advanced and emerging countries, only the dollar and yen the meet these conditions.
  • Neither the euro nor the Swiss franc qualify for this role.

 Abstract :
We define “safe haven currencies” as those able to yield positive excess returns during crises and show that they are likely to have negative risk premia on the long-run. We try to identify them empirically by considering a sample of 26 currencies from advanced and emerging countries over a period spanning from 1999 to 2013. We first spot the currencies yielding negative mean excess returns over the long run and positive ones during crises; only the Japanese yen (JPY) and the US dollar (USD) meet these conditions. Second, we run a smooth transition regression (STR) of the Fama equation, in which we add the VIX as an explanatory and a transition variable, in order to capture the response of exchange rates over the global fi nancial cycle. The results also point out to the USD and the JPY as the only candidates for a safe haven role; despite its long-run appreciation trend, the Swiss franc does not qualify for this role, as it tends to follow the downward movement of the euro during the recent financial turmoil.

 Keywords : Carry trades | Safe haven | Safe haven currencies | Fama equation | Financial cycle | Smooth transition regression models

 JEL : C32, G11, G15
CEPII Working Paper
N°2014-03, February 2014

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 Domaines d'expertise

Monnaie & Finance