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Carry trades, momentum trading and the forward premium anomaly

  • Baillie, Richard T.
  • Chang, Sanders S.

This paper examines the role of carry trade and momentum trading strategies and their implications for the magnitude of the forward premium anomaly. The formal analysis uses a logistic smooth transition regression, with transition variables related to the different currency trading strategies. The hypothesis of uncovered interest parity is found to hold in an upper regime where carry trades appear profitable on the basis of interest differentials and where exchange rate volatility is high.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 14 (2011)
Issue (Month): 3 (August)
Pages: 441-464

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Handle: RePEc:eee:finmar:v:14:y:2011:i:3:p:441-464
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  16. Andreas M. Fischer, 2002. "Fluctuations in the Swiss Franc: What has Changed Since the Euro's Introduction?," Working Papers 02.03, Swiss National Bank, Study Center Gerzensee.
  17. Phillips, Kerk L. & Snow, Karl, 1998. "The forward bias: is it a money tree?," Economics Letters, Elsevier, vol. 61(3), pages 373-379, December.
  18. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
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