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Commodity Trade and the Carry Trade: A Tale of Two Countries

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  • ROBERT READY
  • NIKOLAI ROUSSANOV
  • COLIN WARD

Abstract

Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies†offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity†producing countries from global productivity shocks, forcing final†good producers to absorb them. Commodity†currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

Suggested Citation

  • Robert Ready & Nikolai Roussanov & Colin Ward, 2017. "Commodity Trade and the Carry Trade: A Tale of Two Countries," Journal of Finance, American Finance Association, vol. 72(6), pages 2629-2684, December.
  • Handle: RePEc:bla:jfinan:v:72:y:2017:i:6:p:2629-2684
    DOI: 10.1111/jofi.12546
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    More about this item

    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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