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Carry Trade and Momentum in Currency Markets

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Author Info

  • Craig Burnside

    ()
    (Department of Economics, Duke University, Durham, North Carolina 27708-0097
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Martin Eichenbaum

    ()
    (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Department of Economics, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2600
    Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

  • Sergio Rebelo

    ()
    (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Department of Economics, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2600
    Center for Economic Policy Research, London, EC1V 3PZ, United Kingdom)

Abstract

We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.

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Bibliographic Info

Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

Volume (Year): 3 (2011)
Issue (Month): 1 (December)
Pages: 511-535

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Handle: RePEc:anr:refeco:v:3:y:2011:p:511-535

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Related research

Keywords: uncovered interest parity; exchange rates; currency speculation; rare disaster; peso problem; price pressure;

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Cited by:
  1. Christopher J. Neely & Paul A. Weller, 2011. "Lessons from the evolution of foreign exchange trading strategies," Working Papers 2011-021, Federal Reserve Bank of St. Louis.
  2. Ricardo J. Caballero & Joseph B. Doyle, 2012. "Carry Trade and Systemic Risk: Why are FX Options so Cheap?," NBER Working Papers 18644, National Bureau of Economic Research, Inc.
  3. Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2012. "Currency Momentum Strategies," Working Paper Series 09_12, The Rimini Centre for Economic Analysis.
  4. Travis J. Berge, 2011. "Forecasting disconnected exchange rates," Research Working Paper RWP 11-12, Federal Reserve Bank of Kansas City.
  5. Karnaukh, Nina & Ranaldo, Angelo & Söderlind, Paul, 2013. "Understanding FX Liquidity," Working Papers on Finance 1315, University of St. Gallen, School of Finance.
  6. Olga Klinkowska & Angelica Gonzalez & Abhay Abhyankar, 2012. "Salvaging the C-CAPM: Currency Carry Trade Risk Premia and Conditioning Information," 2012 Meeting Papers 56, Society for Economic Dynamics.
  7. Daniela Gabor, 2012. "Managing Capital Accounts in Emerging Markets: Lessons from the Global Financial Crisis," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 714-731, June.
  8. Tarek A. Hassan & Rui C. Mano, 2014. "Forward and Spot Exchange Rates in a Multi-currency World," NBER Working Papers 20294, National Bureau of Economic Research, Inc.
  9. Martin Lettau & Matteo Maggiori & Michael Weber, 2013. "Conditional Risk Premia in Currency Markets and Other Asset Classes," NBER Working Papers 18844, National Bureau of Economic Research, Inc.
  10. Raza, Ahmad & Marshall, Ben R. & Visaltanachoti, Nuttawat, 2014. "Is there momentum or reversal in weekly currency returns?," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 38-60.
  11. Michael Melvin & John Prins & Duncan Shand, 2013. "Forecasting Exchange Rates: An Investor Perspective," CESifo Working Paper Series 4238, CESifo Group Munich.
  12. Federico Nucera & Giorgio Valente, 2013. "Carry Trades and the Performance of Currency Hedge Funds," Working Papers 032013, Hong Kong Institute for Monetary Research.

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