Working papers

"The Global Interest Rate Differential and the Dollar Carry Trade"

This paper studies the global interest rate differential (GID) -- defined as the difference between the highest and the lowest interest rate among the G10 currencies -- and document that changes in GID contain predictive information about future dollar carry trade returns. Specifically, the dollar carry trade is, on average, only profitable after observing a decrease in GID. A novel trading strategy is presented which exploits the predictability and delivers a Sharpe ratio superior to the dollar carry trade, both in- and out-of-sample. These empirical findings can be understood through the lens of a reduced-form, no-arbitrage model, where the main innovation is a systematic increase in the volatility of pricing kernels that amplifies expected currency returns. This amplification effect sheds crucial light on the profitability of the dollar carry trade and, as a result, on the dynamics of the US dollar itself.

Winner of the Ola Bengtsson Award for best paper at the 7th National PhD Workshop at the Swedish House of Finance 2018

Presented at: Sveriges Riksbank, the 7th National PhD Workshop at the Swedish House of Finance 2018, Stockholm School of Economics, and the 3rd Annual Workshop on Financial Econometrics at Örebro University 2019

"Correlated Risk Factors in Currency Markets"

Assets earn benefits of diversification across risk factors. A change in the correlation between the factors changes the degree of diversification, which directly affects the volatility of returns and -- via volatility timing -- future Sharpe ratios. I find strong evidence of these economic links in currency markets. First, I document that the correlation (CORR) between the dollar factor and the carry factor is highly time-varying, across almost the entire [–1,1] interval. Second, for high (low) interest rate currency returns, a positive CORR (above 0.25) is associated with low (high) volatility and a high (low) future Sharpe ratio. The reverse holds for negative CORR (below –0.25). These results extend to the standard, high-minus-low carry trade (HML). Comparing negative to positive CORR, the average next-month Sharpe ratio of the HML carry trade is 0.20 and 0.99, respectively. Third, I show that CORR is procyclical, and positively related to the US interest rate and global interest rate differentials. CORR is also linked to the time-varying characteristic of the US dollar as a safe haven. Fourth, CORR contains information about the predictability of carry trade crashes.

Presented at: 2nd Frontiers of Factor Investing (virtual) conference at Lancaster UK, Stockholm School of Economics, Nordic Finance Network in Lund 2018, and Sveriges Riksbank

"Operational Cash Holdings in a Real Business Cycle Model with Financial Frictions"

I observe the procyclical behavior of aggregate cash holdings of U.S. firms. To better understand why firms tend to hold more cash in good times I first distinguish between operational cash (used to run the day-to-day business operations), and non-operational cash (used for pre-cautionary motives). In a real business cycle model I find that the procyclical behavior of operational cash holdings can be explained by both a productivity shock and a financial shock (affecting firms' ability to borrow). The productivity shock is the main driver of output in the model, and as such, it is tightly connected to the firm's need for operational cash to finance wages and investments. When extracting the financial shock series from the data, we see a procyclical pattern. As a result, in good economic times, firms tend to shift their financing from equity to debt. To facilitate this shift, firms engage in share repurchases and dividend payments, which require operational cash. I also find that the model-implied volatility of non-operational cash holdings is significantly larger than that of operational cash holdings, for which I provide economic intuition.

Presented at: Stockholm School of Economics and Nordic Finance Network in Bergen 2016

Work in progress

"A Risk Premium in Federal Funds Futures caused by the Effective Lower Bound"

Riksbank publications

"Coronavirus pandemic: The Riksbank's measures and financial developments during spring and summer of 2020" (2021), Sveriges Riksbank Economic Review, 2021:1, joint with Peter Gustafsson, (English / Swedish)

"An index for financial conditions in Sweden" (2020), Staff Memo, Sveriges Riksbank, joint with Jan Alsterlind and Magnus Lindskog, (English / Swedish)