Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation

Christian Wagner

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia and generates economic value when applied in multi-currency portfolios.

Keywords: Exchange rates; Uncovered interest parity; Risk-premia; Carry-trade; Economic value (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-ifn and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Risk-premia, carry-trade dynamics, and economic value of currency speculation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21125

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