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Leveraged carry trade portfolios

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  • Darvas, Zsolt

Abstract

Studying all possible pairs of 11 major currencies and 11 portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 5 (May)
Pages: 944-957

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:5:p:944-957

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Bootstrap Currency market Diversification Leverage Uncovered interest rate parity;

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References

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