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Boosting carry with equilibrium exchange rate estimates

Author

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  • Rubaszek, Michał
  • Beckmann, Joscha
  • Ca' Zorzi, Michele
  • Kwas, Marek

Abstract

We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies. JEL Classification: F31, G12, G15

Suggested Citation

  • Rubaszek, Michał & Beckmann, Joscha & Ca' Zorzi, Michele & Kwas, Marek, 2022. "Boosting carry with equilibrium exchange rate estimates," Working Paper Series 2731, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222731
    Note: 343031
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    References listed on IDEAS

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    Cited by:

    1. Ca’ Zorzi, Michele & Rubaszek, Michał, 2023. "How many fundamentals should we include in the behavioral equilibrium exchange rate model?," Economic Modelling, Elsevier, vol. 118(C).

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    More about this item

    Keywords

    carry trade; equilibrium exchange rate; trading strategies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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