Risk-adjusted return managed carry trade

Philippe Dupuy

Journal of Banking & Finance, 2021, vol. 129, issue C

Abstract: We propose a simple dynamic currency carry trade strategy. Implementation of this strategy requires only two indicators: the aggregate forward discount and historic, global foreign exchange volatility. We find that our dynamic strategy delivers a significantly higher Sharpe ratio and greater skewness than a benchmark carry trade strategy. Our results are robust to the time period and currency choices. Both indicators contribute to predictability, and the improvement in performance is visible in both good and bad times. Standard risk factor models are unable to fully explain the returns of this augmented carry trade.

Keywords: Exchange rate; Carry trade; Portfolio; Risk premium (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:129:y:2021:i:c:s037842662100131x

DOI: 10.1016/j.jbankfin.2021.106172

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