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The carry trade in industrialized and emerging markets

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  • Craig Burnside

Abstract

I revisit the evidence on the profits associated with currency carry trades, explore its relationship to the uncovered interest parity (UIP) puzzle and the behavior of risk premia. I confirm earlier findings that carry trades are profitable, and that UIP fails for a group of industrialized-country currencies. Emerging market carry trades are also profitable, despite there being less "statistical" evidence against UIP. Because most emerging market currencies have persistently high interest rates, time variation in the risk premia of these currencies plays a smaller role in the average profits to emerging market carry trades. I find that those risk factors that seem able to summarize or explain the returns to carry trades in industrialized economies do not explain the returns to investing in emerging market currencies. Additionally, I find that BIS bank capital is relatively insensitive to the interest differentials that make carry trades attractive to investors.

Suggested Citation

  • Craig Burnside, 2014. "The carry trade in industrialized and emerging markets," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(2), pages 48-78, August.
    • Handle: RePEc:chb:bcchec:v:17:y:2014:i:2:p:48-78
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    Cited by:

    1. repec:beo:journl:v:62:y:2018:i:216:p:35-62 is not listed on IDEAS
    2. Claudio Raddatz & Diego Saravia & Jaume Ventura, 2015. "Global Liquidity, Spillovers to Emerging Markets and Policy Responses: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.),Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 1, pages 001-011, Central Bank of Chile.
    3. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.
    4. Zorica Mladenović & Jelena Rašković, 2018. "Econometric Testing Of Uncovered Interest Rate Parity In Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(216), pages 35-62, January –.
    5. Geyikçi, Utku Bora & Özyıldırım, Süheyla, 2021. "To hedge or not to hedge: Carry trade dynamics in the emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    6. Burnside, Craig & Cerrato, Mario & Zhang, Zhekai, 2025. "Foreign Exchange Order Flow as a Risk Factor," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(5), pages 2555-2582, August.
    7. Vasilyev, Dmitry (Васильев, Дмитрий) & Busygin, Vladimir (Бусыгин, Владимир) & Busygin, Sergei (Бусыгин, Сергей), 2016. "Testing and Interpreting Uncovered Interest Parity in Russia [Проверка И Интерпретация Выполнения Процентного Паритета В России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 35-55, August.
    8. Wenliang Guo, 2020. "Currency Regimes, Volatility Risks, and Carry Trades: The Option Value of Government Currency Intervention in Emerging Markets," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(3), pages 1-4.
    9. repec:gla:glaewp:2023-03 is not listed on IDEAS
    10. Auer, Benjamin R. & Hoffmann, Andreas, 2016. "Do carry trade returns show signs of long memory?," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 201-208.

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