| dc.description.abstract | Carry trade strategies has been popular over the years, mainly because of large interest rate
differential. This would seemingly create the possibility for traders to profit from excess returns,
but according to the theory of uncovered interest rate parity (UIP), the interest rate differential will
be offset by a depreciation of the higher interest rate currency. Researchers has often found that
UIP does not hold, and have theorized that a lack of risk premium in the condition might be the
reason.
This master thesis has studied the following research question:
Carry trade: is it possible to identify a risk premium, and is it time varying?
This thesis has tested for the existence of a risk premium on six different currencies against USD.
This was done by creating a regression analysis on time series data for the period of 2000 to 2016.
This regression analysis is used to test whether UIP holds, by regressing the changes in exchange
rates on the forward premium. The regression was also estimated on two sub periods, in order to
see if the financial crisis could affect the results.
The results found in this thesis is contradictory with earlier research in the way that the regression
analysis did not find deviations from UIP for most of the currencies and therefore few signs of a
risk premium. The results from the two sub periods provided obvious differences in the beta
coefficients and therefore a model for a time varying risk premium was analysed.
This model provided results that was consistent with the regression analysis in the way that just
one currency showed sign of constant- and time varying risk premium on a five per cent
significance level. This thesis could therefore generally not identify a constant- or time varying
risk premium. | nb_NO |
