Leveraged carry trade portfolios

Zsolt Darvas

No 802, Working Papers from Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest

Abstract: Studying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.

Keywords: bootstrap; currency market; diversification; interest rate differential; leverage; uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-06-12, Revised 2008-06-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Leveraged carry trade portfolios (2009)
Working Paper: Leveraged Carry Trade Portfolios (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mkg:wpaper:0802

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