Boosting carry with equilibrium exchange rate estimates

Michał Rubaszek, Joscha Beckmann, Michele Ca' Zorzi and Marek Kwas

No 2731, Working Paper Series from European Central Bank

Abstract: We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies. JEL Classification: F31, G12, G15

Keywords: carry trade; equilibrium exchange rate; trading strategies (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-ifn and nep-opm
Note: 343031
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222731

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