Getting Beyond Carry Trade: What Makes a Safe Haven Currency?

By M. Habib, Livio Stracca. Social Science Research Network, 2011

198 citations recorded by the source corpus.

There is already a substantial literature documenting the fact that low yield currencies typically appreciate during times of global financial stress and behave as safe havens. The main objective of this paper is to find out what the fundamentals of safe haven currencies are. We analyse a large panel of 52 currencies in advanced and emerging countries over almost 25 years of data. We find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and to a lesser extent the absolute size of the stock market, an indicator of market size and development. The interest rate spread against the US is significant only for advanced countries, whose currencies are subject to carry trade. More generally, we find that it is hard to predict what currencies would do when global risk aversion is high, as estimates are imprecise and often not stable or robust. This suggests caution in over-interpreting exchange rate movements during financial crises.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/69835ea3d003371ff06c55606eaa31df10b79fe8

Citations in the corpus

• Currency Premia and Global Imbalances (2016, unknown): “…following: (i) We show that sorting currencies on their beta with the global imbalance factor 5This result is also consistent with the empirical work of Habib and Stracca (2012), who nd that net foreign assets are more important for predicting exchange rate returns than interest rate di¤erentials.”
• Global Exchange Rate Configurations: Do Oil Shocks Matter? (2016, unknown): “Similar to Habib and Stracca (2012), we start from a de facto measure of exchange rate flexibility vis-à-vis the USD (or DEM/EUR) defined as: FLEXit ¼ 112 X12 j¼1 Abs Δe′i;t - j ; (4) where Δe′i;t is the bilateral appreciation vis-à-vis the USD (or EUR).”