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Market Microstructure and the Profitability of Currency Trading

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  • Carol Osler

    () (International Business School, Brandeis University, Waltham, Massachusetts 02453)

Abstract

Currency trading is a vast and highly profitable business. This review 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.

Suggested Citation

  • Carol Osler, 2012. "Market Microstructure and the Profitability of Currency Trading," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 469-495, October.
  • Handle: RePEc:anr:refeco:v:4:y:2012:p:469-495
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101726
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    1. repec:eee:ecofin:v:42:y:2017:i:c:p:172-192 is not listed on IDEAS

    More about this item

    Keywords

    carry trade; technical analysis; skewness; liquidity;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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