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Carry trade strategies based on option-implied information: Evidence from a cross-section of funding currencies

Shu-Hsiu Chen

Journal of International Money and Finance, 2017, vol. 78, issue C, 1-20

Abstract: We document carry trade returns based on the moments extracted from options on the underlying currencies. We establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter tails than the returns of other currency pairs. Second, strategies based on option-implied information improve on benchmark strategies based on realized market returns and macroeconomic data. Third, if the option-implied returns of a currency pair are more left-skewed than in the past, anti-carry trades rather than carry trades perform better.

Keywords: Carry trade; Currency options; Option-implied moments; Funding currencies; Carry trade unwinding (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jimfin:v:78:y:2017:i:c:p:1-20