Market Microstructure and the Profitability of Currency Trading
Currency trading is a vast and highly profitable business. This paper examines the profitability of two popular currency trading strategies in light of currency-market microstructure research. The carry-trade strategy involves borrowing a low-interest currency and investing the proceeds in a high-interest currency. Technical trading strategies are determined exclusively on the basis of past asset prices and trading volumes. Under the efficient markets hypothesis, neither of these approaches to speculative trading should produce excess returns. The review shows that the profitability of carry-trade investing and technical trading strategies can represent rational long-run equilibria given the structure of currency markets and the incentives and constraints faced by traders.
|Date of creation:||Sep 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.brandeis.edu/departments/economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus K Brunnermeier, 2002.
"Bubbles and Crashes,"
FMG Discussion Papers
dp401, Financial Markets Group.
- Michael Dueker & Christopher J. Neely, 2006.
"Can Markov switching models predict excess foreign exchange returns?,"
2001-021, Federal Reserve Bank of St. Louis.
- Dueker, Michael & Neely, Christopher J., 2007. "Can Markov switching models predict excess foreign exchange returns?," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 279-296, February.
- Dan Bernhardt & Vladimir Dvoracek & Eric Hughson & Ingrid M. Werner, 2005. "Why Do Larger Orders Receive Discounts on the London Stock Exchange?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1343-1368.
- Simon, David P., 1994. "Further evidence on segmentation in the treasury bill market," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 139-151, January.
- Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010.
"Exchange rate forecasting, order flow and macroeconomic information,"
Journal of International Economics,
Elsevier, vol. 80(1), pages 72-88, January.
- Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2009. "Exchange Rate Forecasting, Order Flow and Macroeconomic Information," CEPR Discussion Papers 7225, C.E.P.R. Discussion Papers.
- Dagfinn Rime & Lucio Sarno & Elvira Sojli, 2007. "Exchange rate forecasting, order flow and macroeconomic information," Working Paper 2007/02, Norges Bank.
- Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2011.
"Spot and forward volatility in foreign exchange,"
Journal of Financial Economics,
Elsevier, vol. 100(3), pages 496-513, June.
- Harald Hau & William Killeen & Michael Moore, 2002.
"How has the euro changed the foreign exchange market?,"
CEPR;CES;MSH, vol. 17(34), pages 149-192, 04.
- H.Hau & W.Killeen & M.Moore, 2003. "How has the euro Changed the Foreign Exchange Market?," DNB Staff Reports (discontinued) 79, Netherlands Central Bank.
- Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2009. "Carry Trades and Global FX Volatility," MPRA Paper 14728, University Library of Munich, Germany.
- Richard Clarida & Josh Davis & Niels Pedersen, 2009.
"Currency Carry Trade Regimes: Beyond the Fama Regression,"
NBER Working Papers
15523, National Bureau of Economic Research, Inc.
- Clarida, Richard & Davis, Josh & Pedersen, Niels, 2009. "Currency carry trade regimes: Beyond the Fama regression," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1375-1389, December.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
- Breedon, Francis & Vitale, Paolo, 2010. "An empirical study of portfolio-balance and information effects of order flow on exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 504-524, April.
- Moore, Michael J. & Payne, Richard, 2011. "On the sources of private information in FX markets," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1250-1262, May.
- Geir H. Bjønnes & Carol L. Osler & Dagfinn Rime, 2009. "Asymmetric information in the interbank foreign exchange market," Working Paper 2008/25, Norges Bank.
- Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
When requesting a correction, please mention this item's handle: RePEc:brd:wpaper:48. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Leslie Yancich)
If references are entirely missing, you can add them using this form.