The Returns to Currency Speculation in Emerging Markets / Craig Burnside, Martin Eichenbaum, Sergio Rebelo.

Format:

Book

Author/Creator:

Burnside, Craig.

Contributor:

National Bureau of Economic Research.

Eichenbaum, Martin.

Rebelo, Sergio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12916.

NBER working paper series no. w12916

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

The carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market.

Notes:

Print version record

February 2007.