Currency Carry Trades

Travis Berge, Oscar Jorda and Alan Taylor

No 16491, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A wave of recent research has studied the predictability of foreign currency returns. A wide variety of forecasting structures have been proposed, including signals such as carry, value, momentum, and the forward curve. Some of these have been explored individually, and others have been used in combination. In this paper we use new econometric tools for binary classification problems to evaluate the merits of a general model encompassing all these signals. We find very strong evidence of forecastability using the full set of signals, both in sample and out-of-sample. This holds true for both an unweighted directional forecast and one weighted by returns. Our preferred model generates economically meaningful returns on a portfolio of nine major currencies versus the U.S. dollar, with favorable Sharpe and skewness characteristics. We also find no relationship between our returns and a conventional set of so-called risk factors.

JEL-codes: C44 F31 F37 G14 G15 G17 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-ifn and nep-mon
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Travis Berge & �scar Jord� & Alan M. Taylor, 2011. "Currency Carry Trades," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 357 - 388.
Published as Currency Carry Trades , Travis Berge, Òscar Jordà, Alan M. Taylor. in NBER International Seminar on Macroeconomics 2010 , Clarida and Giavazzi. 2011

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Journal Article: Currency Carry Trades (2011)
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