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Leveraged Carry Trade Portfolios

Author

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  • Zsolt Darvas

    (Institute of Economics - Hungarian Academy of Sciences)

Abstract

Studying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.

Suggested Citation

  • Zsolt Darvas, 2008. "Leveraged Carry Trade Portfolios," CERS-IE WORKING PAPERS 0822, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:0822
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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