Currency carry trades and global funding risk

Sara Ferreira Filipe, Juuso Nissinen, Matti Suominen*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review


We measure funding constraints in currency markets by deviations in the covered interest rate parity and funding risk by the standard deviation of the magnitude of the funding constraints. Empirically, funding risk is driven by financial sector conditions in the low interest rate countries, oil price, and the actions of the main central banks. Since 2008, funding risk has affected currency carry trading activity, carry trade returns, correlation between carry trade long and short currencies, relative equity returns, and the economic growth in the carry trade long and short countries. We develop a theory of currency markets under funding constraints to explain the phenomena. The model has additional testable implications: For instance, as funding constraints start to bind, it predicts that both the investment and the funding currencies crash relative to a safe asset. This result is observable empirically when we use gold to proxy for the safe asset.

Original languageEnglish
Article number106800
Publication statusPublished - Apr 2023
MoE publication typeA1 Journal article-refereed


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