Victoria Dobrynskaya

Publications in refereed journals

Downside Market Risk of Carry Trades, Review of Finance 18(5), pp. 1885-1913, 2014.

Abstract. I propose a new factor – the global downside market factor – to explain high returns to carry trades. I show that carry trades have high downside market risk, i.e. they crash systematically in the worst states of the world when the global stock market plunges or when a disaster occurs. The downside market factor explains the returns to currency portfolios sorted by the forward discount better than other factors previously proposed in the literature. GMM estimates of the downside beta premium are similar in the currency and stock markets, statistically significant and close to their theoretical value. High returns to carry trades are fair compensation for their high downside market risk.

Winner of EFMA 2013 John Doukas Best Paper Award


Currency Exposure to Downside Risk: Which Fundamentals Matter? Review of International Economics 23(2), pp. 245-360, 2015.

Abstract. I study whether or not countries’ macroeconomic characteristics are systematically related to their currencies’ exposure to the downside market risk. I find that the currency downside risk is strongly associated with the local inflation rate, real interest rate and net foreign asset position. Currencies of countries with high inflation and real interest rates and negative net foreign asset position (debtor countries) are more exposed to the downside risk whereas currencies of countries with low inflation and real interest rates and positive net foreign asset position (creditor countries) exhibit ‘safe haven’ properties. The local real interest rate has the highest explanatory power in accounting for the cross-section of currency exposure to the downside risk. This suggests that the high currency exposure to the downside risk is a consequence of investments in high-yield risky countries and flight from them in ‘hard times’.  


Pricing Within and Across Asset Classes, Finance Research Letters, forthcoming.

Abstract. When an asset-pricing model is claimed to explain a cross-section of portfolio returns, it should do so both within one asset class and across different asset classes. This paper illustrates that this is not always the case using the CAPM and Asness, Moskowitz and Pedensen (2013) models applied to momentum and value portfolios as examples. Apparently, on one hand, the CAPM is almost as good as the AMP model in explaining the portfolio returns across asset classes, but on the other hand, the AMP model is almost as bad as the CAPM in explaining these returns within one asset class. Therefore, applying an asset-pricing model to a single cross-section of returns may generate misleading results.


Working papers

Dynamic Momentum and Contrarian Trading, March 2017, under review, November 2017.

Abstract. High momentum returns cannot be explained by risk factors, but they are negatively skewed and subject to occasional severe crashes. I explore the timing of momentum crashes and show that momentum strategies tend to crash in 1-3 months after the local stock market plunge. Next, I propose a simple dynamic trading strategy which coincides with the standard momentum strategy in calm times, but switches to the opposite contrarian strategy in one month after a market crash and keeps the contrarian position for three months, after which it reverts back to the momentum position. The dynamic momentum strategy turns all major momentum crashes into gains and yields average return, which is about 1.5 times as high as the standard momentum return. The dynamic momentum returns are positively skewed and not exposed to risk factors, have high Sharpe ratio and alpha, persist in different time periods and geographical markets around the Globe.


Upside and Downside Risks in Momentum Returns, under review, April 2017.

Abstract. I provide a novel risk-based explanation for the profitability of momentum strategies. I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market betas than losers. As a result, the winner-minus-loser momentum portfolios are exposed to extra downside market risk, but hedge against the upside market risk. Such asymmetry in the upside and downside risks is a mechanical consequence of rebalancing momentum portfolios. But it is unattractive for an investor because both positive relative downside betas and negative relative upside betas carry positive risk premiums according to the Downside-Risk CAPM. Hence, the high returns to momentum strategies are a mere compensation for their upside and downside risks. The Downside Risk-CAPM is a robust unifying explanation of returns to momentum portfolios, constructed for different geographical and asset markets, and it outperforms alternative multi-factor models.


Arbitrage Opportunities for Cross-Listed Stocks: Evidence from Russia (with E. Gorbatikov), R&R, September 2016.

Abstract. We study alternative arbitrage strategies for stocks of Russian companies and the corresponding depository receipts issued on European exchanges. We describe schemes of arbitrage strategies with and without conversion, estimate all related transaction costs and compare the net returns. We find significantly profitable arbitrage opportunities. The long-short strategies without conversion, although being risky, generate returns which are about twice as high as the returns to the arbitrage strategies with conversion. Arbitrage opportunities are higher for less liquid pairs and in situations when the depository receipts are underpriced. Although the arbitrage returns have declined over time, they are still positive and higher than the market returns. Low liquidity of Russian depository receipts on European exchanges is a significant barrier to arbitrage.