A filtered currency carry trade
- Authors
- Choi, J.H.; Suh, S.
- Issue Date
- Nov-2021
- Publisher
- Elsevier Inc.
- Keywords
- Currency carry trade; Filtering signal; Sorting; Uncovered interest parity
- Citation
- North American Journal of Economics and Finance, v.58
- Journal Title
- North American Journal of Economics and Finance
- Volume
- 58
- URI
- https://scholarworks.bwise.kr/cau/handle/2019.sw.cau/51225
- DOI
- 10.1016/j.najef.2021.101472
- ISSN
- 1062-9408
1879-0860
- Abstract
- In this paper, we document that the predictive capacity of forward discounts on future currency returns not only differs across currencies but also persists. We then propose a new currency carry trade strategy that relies on the differential predictive capacity of forward discounts. We find that the new strategy offers a significant amount of profit improvement over the conventional currency carry trade strategy. We also find that emerging market currencies provide relatively large profit opportunities. While both strategies show decreasing carry trade profits as FX markets get volatile, the relative outperformance of the new carry trade strategy tends to be found in stable periods but disappears in volatile periods. The superiority of the new carry trade relative to the conventional carry trade is robust to various specification changes. © 2021 Elsevier Inc.
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Collections - College of Business & Economics > School of Economics > 1. Journal Articles
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