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Carry Trade: The Gains of Diversification

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  • Craig Burnside
  • Martin Eichenbaum
  • Sergio Rebelo

Abstract

Market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%. (c) 2008 by the European Economic Association.

Suggested Citation

  • Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2008. "Carry Trade: The Gains of Diversification," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 581-588, 04-05.
    • Handle: RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:581-588
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