Optimal currency carry trade strategies

Juan Laborda, Ricardo Laborda and Jose Olmo

International Review of Economics & Finance, 2014, vol. 33, issue C, 52-66

Abstract: This paper studies the optimal asset allocation problem of an investor with a portfolio given by the U.S. risk-free asset and a carry trade benchmark comprising the currencies of the G10 countries. Our optimal strategy is able to adapt to macroeconomic conditions and avoid the so-called crash risk inherent in standard carry trade strategies by constructing a vector of dynamic weights that depends on a set of state variables. We find that the U.S. Ted spread, the U.S. average forward discount, the CRB Industrial return, and a global monetary policy indicator are the key drivers of optimal currency carry trade strategies.

Keywords: Currency carry trade; Uncovered interest parity; CRB industrial return; Monetary policy; Optimal parametric portfolio (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:33:y:2014:i:c:p:52-66

DOI: 10.1016/j.iref.2014.03.007

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