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Currency Strategies and Sovereign Ratings

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Currency Strategies and Sovereign Ratings” authored by Nina Karnaukh illuminates the enthralling nexus between renowned currency strategies (carry trade, momentum, value) and sovereign ratings.

Through a meticulous investigation, the study meticulously depicts the profitability of the momentum strategy, unveiling its substantial and noteworthy implications primarily among high-credit-risk currencies, while remaining nonexistent within lower-credit-risk currencies.

Profoundly, it is unveiled that the currency momentum strategy’s profitability diminishes radically upon excluding currencies rated BBB- or worse, accounting for 16% of currency months within the sample. Interestingly, the study discerns that country-level credit risk conditions hold no sway over the carry trade and value strategies, which manifest profitability irrespective of currency credit risk rating.

Furthermore, the researchers ascertain that sovereign rating modifications do not yield a significant impact on the performance of the predominant currency strategies.

The insightful revelations presented within the paper fortify our understanding of currency market behavior, shedding light on the innate interplay between currency strategies and sovereign ratings, thereby enriching the discourse surrounding exchange rates and sovereign credit risk evaluation.

Abstract Of Paper

This paper investigates a link between the most popular currency strategies (carry trade, momentum, value) and sovereign ratings. I document that the profitability of the momentum strategy is large and significant among higher credit risk currencies, but is nonexistent among lower credit risk currencies. The profitability of currency momentum disappears when currencies rated BBB- or worse (16% of currency months) are excluded from the sample. The country credit risk conditions do not apply to the carry trade and value, which are profitable among lower and higher credit risk currencies. Sovereign rating changes do not have a significant impact on the performance of the most popular currency strategies.

Original paper – Download PDF

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Author

Nina Karnaukh
Ohio State University; Fisher College of Business – Department of Finance

Conclusion

In conclusion, the research paper “Currency Strategies and Sovereign Ratings” authored by Nina Karnaukh delivers compelling insights into the captivating relationship between prominent currency strategies (carry trade, momentum, value) and sovereign ratings.

The study divulges the resounding profitability of the momentum strategy, especially in the realm of high-credit-risk currencies, juxtaposed against its negligible presence within lower-credit-risk currencies.

The research accentuates the pivotal significance of currencies rated BBB- or worse, enveloping 16% of currency months, underscoring the notable dissipation of currency momentum strategy profitability upon their exclusion.

Additionally, the study apprises the intrigue that the carry trade and value strategies remain consistently lucrative across varying currency credit risk ratings, signifying their resilience underlying credit-rated circumstances.

Remarkably, it is affirmed that sovereign rating alterations do not exert any discernible influence on the performance of prominent currency strategies.

The research crystallizes our understanding of currency market dynamics, emanating from its comprehensive exploration of the intricate relationship between currency strategies and sovereign ratings, thus contributing to a refined comprehension of exchange rates and sovereign credit risk assessment.

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FAQ

Q1: What is the focus of the research paper “Currency Strategies and Sovereign Ratings”?

A1: The research paper investigates the relationship between popular currency strategies (carry trade, momentum, value) and sovereign ratings. It aims to understand how the profitability of these currency strategies is associated with the credit risk of sovereign ratings.

Q2: What is the main finding regarding the profitability of the momentum strategy in relation to sovereign ratings?

A2: The research finds that the profitability of the momentum strategy is significant among higher credit risk currencies but is nonexistent among lower credit risk currencies. Specifically, the momentum strategy’s profitability diminishes when excluding currencies rated BBB- or worse, constituting 16% of currency months in the sample.

Q3: How do the carry trade and value strategies perform in relation to currency credit risk ratings?

A3: Unlike the momentum strategy, the carry trade and value strategies are found to be profitable among both lower and higher credit risk currencies. The study notes that the profitability of these strategies remains consistent across varying currency credit risk ratings, indicating their resilience in different credit-rated circumstances.

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