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The performance of NDF carry trades

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  • Doukas, John A.
  • Zhang, Hao

Abstract

This paper investigates the performance of carry trade strategies for currencies with non-deliverable forward (NDF) contracts. We find that carry trades for currencies with NDF contracts are associated with higher Sharpe ratios compared to carry trades for currencies with deliverable forward (DF) contracts. We also find that, during the recent financial crisis, DF carry trades incur heavy losses while NDF carry trades realize insignificant losses. DF carry trade payoffs are shaped by credit risk, global foreign exchange (FX) volatility and crash risk. In contrast, NDF carry trade payoffs are driven by global FX volatility and crash risk, liquidity risk, and currency convertibility risk measured by deviations from covered interest parity in offshore markets while global convertibility risk has a limited effect on carry trades.

Suggested Citation

  • Doukas, John A. & Zhang, Hao, 2013. "The performance of NDF carry trades," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 172-190.
  • Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:172-190
    DOI: 10.1016/j.jimonfin.2013.04.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fredy Gamboa-Estrada, 2016. "Carry Trade y Depreciaciones Bruscas del Tipo de Cambio en Colombia," Borradores de Economia 957, Banco de la Republica de Colombia.
    2. Egbers, Tom & Swinkels, Laurens, 2015. "Can implied volatility predict returns on the currency carry trade?," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 14-26.
    3. repec:rnp:ecopol:ep1751 is not listed on IDEAS
    4. Bank for International Settlements, 2015. "Currency carry trades in Latin America," BIS Papers, Bank for International Settlements, number 81.
    5. Orlov, Vitaly & Äijö, Janne, 2015. "Benefits of wavelet-based carry trade diversification," Research in International Business and Finance, Elsevier, vol. 34(C), pages 17-32.
    6. Doskov, Nikolay & Swinkels, Laurens, 2015. "Empirical evidence on the currency carry trade, 1900–2012," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 370-389.
    7. repec:eee:quaeco:v:65:y:2017:i:c:p:304-313 is not listed on IDEAS
    8. repec:bla:manchs:v:85:y:2017:i::p:57-78 is not listed on IDEAS
    9. 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.
    10. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

    More about this item

    Keywords

    Non-deliverable forward; Carry trade; Covered interest parity; Exchange rate risk;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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