Foreign exchange predictability and the carry trade: A decomposition approach

Stanislav Anatolyev, Nikolay Gospodinov, Ibrahim Jamali and Xiaochun Liu ()

Journal of Empirical Finance, 2017, vol. 42, issue C, 199-211

Abstract: In this paper, we decompose currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability than raw returns, and use the joint conditional distribution of these components to obtain forecasts of future exchange rate returns. Our results suggest that the decomposition model produces higher forecast and directional accuracy than any of the competing models. We undertake trading exercises using carry trade returns and show that the forecasting gains translate into economically and statistically significant (risk-adjusted) profitability when trading individual currencies or forming currency portfolios based on the predicted returns from the decomposition model.

Keywords: Exchange rate forecasting; Carry trade; Return decomposition; Copula; Joint predictive distribution (search for similar items in EconPapers)
JEL-codes: C32 C53 F31 F37 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539817300294
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:42:y:2017:i:c:p:199-211

DOI: 10.1016/j.jempfin.2017.03.005

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().