Market Microstructure and the Profitability of Currency Trading

Carol Osler ()
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Carol Osler: International Business School, Brandeis University

No 48, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Currency trading is a vast and highly profitable business. This paper examines the profitability of two popular currency trading strategies in light of currency-market microstructure research. The carry-trade strategy involves borrowing a low-interest currency and investing the proceeds in a high-interest currency. Technical trading strategies are determined exclusively on the basis of past asset prices and trading volumes. Under the efficient markets hypothesis, neither of these approaches to speculative trading should produce excess returns. The review shows that the profitability of carry-trade investing and technical trading strategies can represent rational long-run equilibria given the structure of currency markets and the incentives and constraints faced by traders.

Keywords: Carry trade; Technical analysis; Skewness; Liquidity (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-09
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP48.pdf First version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:48

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