Carry Trade: The Gains of Diversification

Craig Burnside, Martin Eichenbaum and Sergio Rebelo ()

Journal of the European Economic Association, 2008, vol. 6, issue 2-3, 581-588

Abstract: Market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%. (c) 2008 by the European Economic Association.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:581-588

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