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The Profitability of Carry Trade - La redditività del carry trade

Author

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  • Moosa, Imad A.

    () (Department of Accounting and Finance, Monash University)

Abstract

The profitability of carry trade is investigated using six currency combinations and historical data covering the period December 1999-June 2006. Hypothesis testing and Monte Carlo simulations produce results that cast doubt on the profitability of carry trade, as there is mostly a fifty-fifty chance that profit can be made from a single carry trade operation. The results also show that carry trade is not an exclusively yen-based operation, in the sense that currency combinations not involving the yen can be as profitable as combinations involving the yen. Because the interest rate differential is not the only factor determining the profitability of carry trade, a proper criterion for selecting the underlying positions must embody both the interest rate differential and exchange rate volatility. It is concluded that over-enthusiasm about carry trade is a reflection of herd behaviour. - In questo studio si analizza la redditività del carry trade utilizzando sei combinazioni di valute riferite al periodo dicembre 1999-giugno 2006. I risultati dei test e le simulazioni Monte Carlo pongono dei dubbi sulla redditività del carry trade, in quanto la probabilità di ottenere guadagni da una singola operazione è del 50 per cento. Tali risultati mostrano anche che il carry trade non è una pratica da basare esclusivamente sullo yen, perchè le combinazioni di valute che non includono lo yen possono essere redditizie al pari di quelle che lo comprendono. Poiché il differenziale del tasso di interesse non è il solo fattore che determina la redditività del carry trade, un criterio opportuno di selezione deve incorporare anche la volatilità del cambio. Si conclude che l’eccesso di entusiasmo circa il carry trade è il risultato di un herd behaviour.

Suggested Citation

  • Moosa, Imad A., 2010. "The Profitability of Carry Trade - La redditività del carry trade," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 63(3), pages 361-380.
  • Handle: RePEc:ris:ecoint:0602
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    References listed on IDEAS

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    1. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
    2. Gabriele Galati & Michael Melvin, 2004. "Why has FX trading surged?," BIS Quarterly Review, Bank for International Settlements, December.
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    Cited by:

    1. Bhatti, Razzaque H., 2014. "The existence of uncovered interest parity in the CIS countries," Economic Modelling, Elsevier, vol. 40(C), pages 227-241.

    More about this item

    Keywords

    Carry Trade; Uncovered Interest Parity;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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