Boosting Carry with Equilibrium Exchange Rate Estimates

Michał Rubaszek (), Joscha Beckmann, Michele Ca’ Zorzi and Marek Kwas
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Michał Rubaszek: Collegium of Economic Analysis
Joscha Beckmann: FernUniversität Hagen and Kiel Institute for the World Economy
Michele Ca’ Zorzi: European Central Bank
Marek Kwas: Collegium of Economic Analysis

Open Economies Review, 2025, vol. 36, issue 4, No 10, 1307 pages

Abstract: Abstract We construct currency portfolios based on the premise that exchange rates gradually converge toward their equilibrium levels, yielding three key findings. First, this convergence can be leveraged to build profitable portfolios. Second, the slow rate of convergence over shorter horizons aligns with the sustained profitability of carry trade strategies, where investors borrow in low-yield currencies and invest in high-yield ones. Third, incorporating the predictive insights of equilibrium exchange rates can boost the performance of carry trade strategies.

Keywords: Equilibrium exchange rate; Carry trade; Trading strategies (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11079-024-09795-0

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