Leveraged carry trade portfolios

Zsolt Darvas

Journal of Banking & Finance, 2009, vol. 33, issue 5, 944-957

Abstract: Studying all possible pairs of 11 major currencies and 11 portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.

Keywords: Bootstrap; Currency; market; Diversification; Leverage; Uncovered; interest; rate; parity (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (49)

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Related works:
Working Paper: Leveraged Carry Trade Portfolios (2008)
Working Paper: Leveraged carry trade portfolios (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:5:p:944-957

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