Leveraged carry trade portfolios
AbstractStudying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.
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Bibliographic InfoPaper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 0802.
Length: 41 pages
Date of creation: 12 Jun 2008
Date of revision: 18 Jun 2008
bootstrap; currency market; diversification; interest rate differential; leverage; uncovered interest rate parity;
Other versions of this item:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-21 (All new papers)
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