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Is Implied Taylor Rule Interest Rate Applicable as a Carry Trade Strategy?

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  • Gokcen Ogruk

    (School of Business and Professional Studies, Texas Wesleyan University, Fort Worth, TX, USA.)

Abstract

This paper evaluates the performance of carry trade strategies with implied Taylor rule interest rate differentials and compares the performance statistics of them over the naive carry trade strategy with actual interest rates. Carry trade, a currency speculation strategy, between high-interest rate and low-interest rate currencies generates high payoff on average and has a possibility of crash risk. I argue that the crash risk is reduced with implied Taylor rule interest rate differentials as a trading strategy in Yen and Franc trades for the whole sample period. During the recent financial crisis, the carry trading strategies with Taylor rule perform best in terms of mean returns, risk adjusted returns and downside risk.

Suggested Citation

  • Gokcen Ogruk, 2014. "Is Implied Taylor Rule Interest Rate Applicable as a Carry Trade Strategy?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 909-919.
    • Handle: RePEc:eco:journ1:2014-04-17
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    More about this item

    Keywords

    Carry Trade; Taylor Rule Fundamentals.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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