The Returns to Currency Speculation in Emerging Markets
AbstractThe carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12916.
Date of creation: Feb 2007
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Publication status: published as Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," American Economic Review, American Economic Association, vol. 97(2), pages 333-338, May.
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Other versions of this item:
- Martin Eichenbaum & Craig Burnside & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 333-338, May.
- Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2007. "The Returns to Currency Speculation in Emerging Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6148, C.E.P.R. Discussion Papers.
- F3 - International Economics - - International Finance
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-24 (All new papers)
- NEP-CBA-2007-02-24 (Central Banking)
- NEP-IFN-2007-02-24 (International Finance)
- NEP-MON-2007-02-24 (Monetary Economics)
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