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Carry trades and monetary conditions

Author

Listed:
  • Falconio, Andrea

Abstract

This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that con- sists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade average excess return, Sharpe ratio and 5% quantile differ substantially across expansive and restrictive conventional mone- tary policy before the onset of the recent financial crisis. By contrast, the considered parameters are not affected by unconventional monetary policy during the financial crisis. JEL Classification: F31, G15, E52

Suggested Citation

  • Falconio, Andrea, 2016. "Carry trades and monetary conditions," Working Paper Series 1968, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20161968
    Note: 2171716
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1968.pdf
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    References listed on IDEAS

    as
    1. Jensen, Gerald R. & Moorman, Theodore, 2010. "Inter-temporal variation in the illiquidity premium," Journal of Financial Economics, Elsevier, vol. 98(2), pages 338-358, November.
    2. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    3. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521845731.
    4. Loriano Mancini & Angelo Ranaldo & Jan Wrampelmeyer, 2013. "Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums," Journal of Finance, American Finance Association, vol. 68(5), pages 1805-1841, October.
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    More about this item

    Keywords

    carry trade; monetary conditions; volatility;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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