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A Proposal to Boost the Profitability of Carry Trade

Author

Listed:
  • Imad Moosa

    (School of Economics, Finance and Marketing, RMIT University, 445 Swanston Street, Melbourne, Victoria 3000, Australia)

  • Kelly Burns

    (School of Economics, Finance and Marketing, RMIT University, 445 Swanston Street, Melbourne, Victoria 3000, Australia)

Abstract

It is demonstrated that carry trade can be made more profitable by taking into account the drift factor in the random walk behavior of the underlying exchange rate if it is significant. By using four currency combinations we find the drift factor to be significant at horizons longer than one month and that if it is taken into account, the outcome of carry trade improves in terms of risk-adjusted return. The results and conclusions are consistent whether the exercise is conducted within-sample or out of-sample.

Suggested Citation

  • Imad Moosa & Kelly Burns, 2013. "A Proposal to Boost the Profitability of Carry Trade," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-9.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:04:n:s0219091513500252
    DOI: 10.1142/S0219091513500252
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    Cited by:

    1. Imad Moosa & Kelly Burns, 2016. "The random walk as a forecasting benchmark: drift or no drift?," Applied Economics, Taylor & Francis Journals, vol. 48(43), pages 4131-4142, September.

    More about this item

    Keywords

    Carry trade; random walk; risk-adjusted return;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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