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The performance of NDF carry trades

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  • Doukas, John A.
  • Zhang, Hao
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    Abstract

    This paper investigates the performance of carry trade strategies for currencies with non-deliverable forward (NDF) contracts. We find that carry trades for currencies with NDF contracts are associated with higher Sharpe ratios compared to carry trades for currencies with deliverable forward (DF) contracts. We also find that, during the recent financial crisis, DF carry trades incur heavy losses while NDF carry trades realize insignificant losses. DF carry trade payoffs are shaped by credit risk, global foreign exchange (FX) volatility and crash risk. In contrast, NDF carry trade payoffs are driven by global FX volatility and crash risk, liquidity risk, and currency convertibility risk measured by deviations from covered interest parity in offshore markets while global convertibility risk has a limited effect on carry trades.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261560613000417
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 36 (2013)
    Issue (Month): C ()
    Pages: 172-190

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    Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:172-190

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Non-deliverable forward; Carry trade; Covered interest parity; Exchange rate risk;

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