Risk-premia, carry-trade dynamics, and economic value of currency speculation

Christian Wagner

Journal of International Money and Finance, 2012, vol. 31, issue 5, 1195-1219

Abstract: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited ‘forward bias puzzle’ originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia, however, the economic value generated by bilateral carry-trades is limited.

Keywords: Exchange rates; Uncovered interest parity; Risk-premia; Carry-trade; Economic value (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:5:p:1195-1219

DOI: 10.1016/j.jimonfin.2012.01.013

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