Do Currency Fundamentals Matter for Currency Speculators?
AbstractThe answer seems affirmative. We compare currency carry trades with an investment strategy based on currency fundamentals: taking a long (short) position in undervalued (overvalued) currencies. Carry trades have high risk-adjusted returns, but are subject to "crash risk." In contrast, the fundamental strategy has lower risk-adjusted returns, but is less prone to crash risk, because the realization of crash risk coincides with corrections towards fundamentals. In particular, the fundamental strategy outperformed carry trades during the recent global financial crisis. Building on these results, we present early warning indicators for potential turbulence in the currency market.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 10/39.
Date of creation: 01 Feb 2010
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- NEP-ALL-2010-03-28 (All new papers)
- NEP-CBA-2010-03-28 (Central Banking)
- NEP-IFN-2010-03-28 (International Finance)
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- Habib, Maurizio Michael & Stracca, Livio, 2011.
"Getting beyond carry trade: what makes a safe haven currency?,"
Working Paper Series
1288, European Central Bank.
- Habib, Maurizio M. & Stracca, Livio, 2012. "Getting beyond carry trade: What makes a safe haven currency?," Journal of International Economics, Elsevier, vol. 87(1), pages 50-64.
- Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.
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