Carry and trend strategies in FX markets

Ueli Mettler (), Markus Thöny and Hansjörg Schmidt
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Ueli Mettler: C-ALM AG

Journal of Asset Management, 2010, vol. 11, issue 5, No 3, 331 pages

Abstract: Abstract This article addresses the profitability of Carry and Trend strategies for the 12 most liquid FX markets. While the Carry strategy tries to exploit the forward premium anomaly by buying high-interest currencies and selling low-interest currencies, the herein applied Trend rule buys the outperformers and sells the underperformers in the considered FX universe. Unlike the empirical literature in this field, which evaluates trading rules sequentially for each currency pair, we form zero-investment multi-currency portfolios that are based on a consistent rating of each currency in the universe. The link between the desired long/short currency allocations and the required contract sizes in the available pairwise forward contracts is then accomplished by solving a constrained transaction cost minimization problem. We show that while the profitability of Carry strategies has been seriously hampered during the recent financial crisis, Trend strategies have celebrated an unexpected revival.

Keywords: Carry; Trend; UIP; FX (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/jam.2010.18

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