 The out-of-sample performance of carry tradesPo-Hsuan Hsu, Mark P. Taylor, Zigan Wang and Yan Li Journal of International Money and Finance, 2024, vol. 143, issue C Abstract: We carry out a large-scale investigation of the reliability of the profitability of carry trade strategies, using foreign exchange data for 48 countries over 36 years, employing reality check, superior predictive ability test, and stepwise tests to correct for data-snooping bias (the factor of luck in model selection). Carry trade strategies chosen as profitable in one period are generally not profitable in an ensuing out-of-sample sample period, especially after correcting for data-snooping and even after allowing for learning and stop-loss strategies. Any evidence of consistency in carry trade profitability that is found is concentrated in a relatively brief historical period, 1998-2005. We further investigate particular currency pairs that may drive the out-of-sample profitability during this period, and find their performance to be unstable in general. Our findings thus highlight the instability and the importance of chance or luck in generating profits from carry trades. Keywords: Foreign exchange; Trading rules; Carry trade; Data-snooping bias (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:143:y:2024:i:c:s0261560624000299 DOI: 10.1016/j.jimonfin.2024.103042 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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