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Carry trades, momentum trading and the forward premium anomaly

Richard T. Baillie and Sanders Chang ()

Journal of Financial Markets, 2011, vol. 14, issue 3, 441-464

Abstract: This paper examines the role of carry trade and momentum trading strategies and their implications for the magnitude of the forward premium anomaly. The formal analysis uses a logistic smooth transition regression, with transition variables related to the different currency trading strategies. The hypothesis of uncovered interest parity is found to hold in an upper regime where carry trades appear profitable on the basis of interest differentials and where exchange rate volatility is high.

Keywords: Currency; trading; strategies; Uncovered; interest; parity; Forward; premium; anomaly; Nonlinearity; LSTR; models (search for similar items in EconPapers)
Date: 2011
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