Currency Carry Trades / Travis J. Berge, Òscar Jordà, Alan M. Taylor.

Format:

Book

Author/Creator:

Berge, Travis J.

Contributor:

National Bureau of Economic Research.

Jordà, Òscar.

Taylor, Alan M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16491.

NBER working paper series no. w16491

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

October 2010.