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US Dollar Carry Trades in the Era of "Cheap Money"

Author

Listed:
  • Ali Shehadeh

    () (Queen’s University Belfast
    The University of Jordan)

  • Peter Erdos

    () (RPM Risk and Portfolio Management AB, Stockholm)

  • Youwei Li

    () (Queen's Management School
    Queen’s University Belfast)

  • Michael Moore

    () (Warwick Business School
    University of Warwick
    Ghent University)

Abstract

In this paper, we employ a unique dataset of actual US dollar (USD) forward positions against a number of currencies taken by so-called commodity trading advisors (CTAs). We investigate the extent to which these positions exhibit a pattern of USD carry trading or other patterns of currency trading over the recent period of ultra-loose US monetary policy. Our analysis indeed shows that USD positions against emerging-market currencies are characterised by a pattern of carry trading. That is, the US dollar, as the lower-yielding currency, is associated with short positions. The payoff distributions of these positions, moreover, are found to have positive Sharpe ratios, negative skewness and high kurtosis. On the other hand, we find that USD positions against other developed-market currencies have a pattern completely opposite to carry trading, which is in line with the uncovered interest parity trading; i.e. the lower-yielding (higher-yielding) currency is associated with long (short) positions.

Suggested Citation

  • Ali Shehadeh & Peter Erdos & Youwei Li & Michael Moore, 2016. "US Dollar Carry Trades in the Era of "Cheap Money"," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(5), pages 374-404, October.
  • Handle: RePEc:fau:fauart:v:66:y:2016:i:5:p:374-404
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    References listed on IDEAS

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    More about this item

    Keywords

    commodity trading advisors (CTAs); foreign exchange rate; carry trade;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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