The carry trade and fundamentals: Nothing to fear but FEER itself

Oscar Jorda and Alan Taylor

Journal of International Economics, 2012, vol. 88, issue 1, 74-90

Abstract: Risky arbitraging based on interest rate differentials between two countries is typically referred to as a carry trade. Up until the recent global financial crisis, these trades generated years of persistent positive returns, which were hard to reconcile with standard pricing kernels. In 2008 these trades blew up, which seemed to weaken the case for a puzzle relating to predictable currency returns. But the rise and fall of this puzzle in the academic literature has only been concerned with naïve carry trades based on yield signals alone. We show, however, that some simple and more realistic fundamentals-augmented trading strategies would have generated strong and sustained positive profits that endured through the turmoil.

Keywords: Uncovered interest parity; Efficient markets; Exchange rates; Receiver operating characteristic curve; Correct classification frontier (search for similar items in EconPapers)
JEL-codes: C44 F31 F37 G15 G17 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

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Related works:
Working Paper: The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself (2009)
Working Paper: The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:88:y:2012:i:1:p:74-90

DOI: 10.1016/j.jinteco.2012.03.001

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