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Commodity Trade and the Carry Trade: a Tale of Two Countries

  • Robert Ready
  • Nikolai Roussanov
  • Colin Ward

Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. "Commodity currencies'' tend to have high interest rates while low interest rate currencies belong to exporters of finished goods. This pattern arises in a complete-markets model with trade specialization and limited shipping capacity, whereby commodity-producing countries are insulated from global productivity shocks, which are absorbed by the final goods producers. Empirically, a commodity-based strategy explains a substantial portion of the carry-trade risk premia, and all of their pro-cyclical predictability with commodity prices and shipping costs, as predicted by the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19371.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19371
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