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Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation

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  • Wagner, Christian

Abstract

In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia and generates economic value when applied in multi-currency portfolios.

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  • Wagner, Christian, 2009. "Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation," MPRA Paper 21125, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21125
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    Cited by:

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    3. Pedro Pires Ribeiro & José Dias Curto, 2018. "How do zero-coupon inflation swaps predict inflation rates in the euro area? Evidence of efficiency and accuracy on 1-year contracts," Empirical Economics, Springer, vol. 54(4), pages 1451-1475, June.
    4. Norman C. Miller, 2014. "Exchange Rate Economics," Books, Edward Elgar Publishing, number 14981.

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    Keywords

    Exchange rates; Uncovered interest parity; Risk-premia; Carry-trade; Economic value;
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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