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Market Microstructure and the Profitability of Currency Trading

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  • Carol Osler

    (International Business School, Brandeis University)

Abstract

Currency trading is a vast and highly profitable business. This paper examines the profitability of two popular currency trading strategies in light of currency-market microstructure research. The carry-trade strategy involves borrowing a low-interest currency and investing the proceeds in a high-interest currency. Technical trading strategies are determined exclusively on the basis of past asset prices and trading volumes. Under the efficient markets hypothesis, neither of these approaches to speculative trading should produce excess returns. The review shows that the profitability of carry-trade investing and technical trading strategies can represent rational long-run equilibria given the structure of currency markets and the incentives and constraints faced by traders.

Suggested Citation

  • Carol Osler, 2012. "Market Microstructure and the Profitability of Currency Trading," Working Papers 48, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:48
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP48.pdf
    File Function: First version, 2012
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    References listed on IDEAS

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    Cited by:

    1. Chandrinos, Spyros K. & Lagaros, Nikos D., 2018. "Construction of currency portfolios by means of an optimized investment strategy," Operations Research Perspectives, Elsevier, vol. 5(C), pages 32-44.
    2. Florian El Mouaaouy, 2018. "Financial crime ‘hot spots’ – empirical evidence from the foreign exchange market," The European Journal of Finance, Taylor & Francis Journals, vol. 24(7-8), pages 565-583, May.
    3. Chang, Ya-Ting & Gau, Yin-Feng & Hsu, Chih-Chiang, 2017. "Liquidity Commonality in Foreign Exchange Markets During the Global Financial Crisis and the Sovereign Debt Crisis: Effects of Macroeconomic and Quantitative Easing Announcements," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 172-192.

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    More about this item

    Keywords

    Carry trade; Technical analysis; Skewness; Liquidity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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