Market Microstructure and the Profitability of Currency Trading
AbstractCurrency 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.
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Bibliographic InfoPaper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 48.
Length: 47 pages
Date of creation: Sep 2012
Date of revision:
Carry trade; Technical analysis; Skewness; Liquidity;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
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