A filtered currency carry trade

Jin Ho Choi and Sangwon Suh

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

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.

Keywords: Uncovered interest parity; Currency carry trade; Sorting; Filtering signal (search for similar items in EconPapers)
JEL-codes: F31 G11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821000930

DOI: 10.1016/j.najef.2021.101472

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