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Still crazy after all these years: the returns on carry trade

Author

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  • Emilio, Colombo
  • Gianfranco, Forte
  • Roberto, Rossignoli

Abstract

This paper proposes a novel approach to provide directional forecasts for carry trade strategies; this approach is based on Support VectorMachines (SVM), a learning algorithm which delivers extremely promising results. Building on recent findings of the literature on carry trade we condition the SVM on indicators of uncertainty and risk; we show that this provides a dramatic improvement of the performance of the strategy, in particular during periods of financial distress such as the recent financial crises. Disentangling between measures of risk we show that the best performances are obtained by conditioning the SVM on measures of liquidity risk rather than on market volatility.

Suggested Citation

  • Emilio, Colombo & Gianfranco, Forte & Roberto, Rossignoli, 2016. "Still crazy after all these years: the returns on carry trade," Working Papers 327, University of Milano-Bicocca, Department of Economics, revised 07 Feb 2016.
  • Handle: RePEc:mib:wpaper:327
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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper327.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Cenedese, Gino & Sarno, Lucio & Tsiakas, Ilias, 2014. "Foreign exchange risk and the predictability of carry trade returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 302-313.
    3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    4. 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.
    5. Papadimitriou, Theophilos & Gogas, Periklis & Stathakis, Efthimios, 2014. "Forecasting energy markets using support vector machines," Energy Economics, Elsevier, vol. 44(C), pages 135-142.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Carry trade; Support VectorMachines; market volatility;

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