Leveraged Carry Trade Portfolios
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.
|Date of creation:||Oct 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (+36-1) 309-2652
Fax: (36-1) 319-3136
Web page: http://econ.core.hu
More information through EDIRC
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.:
- Masazumi Hattori & Hyun Song Shin, 2007. "The Broad Yen Carry Trade," IMES Discussion Paper Series 07-E-19, Institute for Monetary and Economic Studies, Bank of Japan.
- Emmanuel Farhi & Xavier Gabaix, 2015.
"Rare Disasters and Exchange Rates,"
71001, Harvard University OpenScholar.
- Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc.
- Farhi, Emmanuel & Gabaix, Xavier, 2015. "Rare Disasters and Exchange Rates," CEPR Discussion Papers 10334, C.E.P.R. Discussion Papers.
- Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers 47, Society for Economic Dynamics.
- 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.
- Belaire-Franch, Jorge & Opong, Kwaku K., 2005. "Some evidence of random walk behavior of Euro exchange rates using ranks and signs," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1631-1643, July.
- Kuntara Pukthuanthong & Lee R. Thomas III & Carlos Bazan, 2007. "Random walk currency futures profits revisited," International Journal of Managerial Finance, Emerald Group Publishing, vol. 3(3), pages 263-286, July.
- Martin Eichenbaum & Craig Burnside & Sergio Rebelo, 2007.
"The Returns to Currency Speculation in Emerging Markets,"
American Economic Review,
American Economic Association, vol. 97(2), pages 333-338, May.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," NBER Working Papers 12916, National Bureau of Economic Research, Inc.
- Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2007. "The Returns to Currency Speculation in Emerging Markets," CEPR Discussion Papers 6148, C.E.P.R. Discussion Papers.
- Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011.
"Do Peso Problems Explain the Returns to the Carry Trade?,"
Review of Financial Studies,
Society for Financial Studies, vol. 24(3), pages 853-891.
- A. Craig Burnside & Martin S. Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2008. "Do Peso Problems Explain the Returns to the Carry Trade?," NBER Working Papers 14054, National Bureau of Economic Research, Inc.
- Burnside, Craig & Eichenbaum, Martin & Kleshchelski, Isaac & Rebelo, Sérgio, 2008. "Do Peso Problems Explain the Returns to the Carry Trade?," CEPR Discussion Papers 6873, C.E.P.R. Discussion Papers.
- A. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio T. Rebelo, 2010. "Do Peso Problems Explain the Returns to the Carry Trade?," Working Papers 10-44, Duke University, Department of Economics.
- Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
- Lee R. Thomas III, 1986. "Random walk profits in currency futures trading," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(1), pages 109-125, 03.
- Villanueva, O. Miguel, 2007. "Forecasting Currency Excess Returns: Can the Forward Bias Be Exploited?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(04), pages 963-990, December.
- Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2008.
"Common Risk Factors in Currency Markets,"
NBER Working Papers
14082, National Bureau of Economic Research, Inc.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
- Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
- Chris Becker & Kristina Clifton, 2007. "Hedge fund activity and carry trades," CGFS Papers chapters, in: Bank for International Settlements (ed.), Research on global financial stability: the use of BIS international financial statistics, volume 29, pages 156-175 Bank for International Settlements.
- Driessen, Joost & Laeven, Luc, 2007. "International portfolio diversification benefits: Cross-country evidence from a local perspective," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1693-1712, June.
- Joseph E. Gagnon & Alain P. Chaboud, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers 899, Board of Governors of the Federal Reserve System (U.S.).
- Yang, Jian & Su, Xiaojing & Kolari, James W., 2008. "Do Euro exchange rates follow a martingale? Some out-of-sample evidence," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 729-740, May.
- Olson, Dennis, 2004. "Have trading rule profits in the currency markets declined over time?," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 85-105, January.
- Christian Dunis & Jia Miao, 2007. "Trading foreign exchange portfolios with volatility filters: the carry model revisited," Applied Financial Economics, Taylor & Francis Journals, vol. 17(3), pages 249-255.
- Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
When requesting a correction, please mention this item's handle: RePEc:has:discpr:0822. 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: (Adrienn Foldi)
If references are entirely missing, you can add them using this form.