The Profitability of Carry Trade

Moosa, I 2010, 'The Profitability of Carry Trade ', Economia Internazionale , vol. 63, no. 3, pp. 361-380.

Document type: Journal Article
Collection: Journal Articles

Title The Profitability of Carry Trade
Author(s) Moosa, I
Year 2010
Journal name Economia Internazionale
Volume number 63
Issue number 3
Start page 361
End page 380
Total pages 20
Publisher Camera di Commercio Industria Artigianato e Agricoltura di Genova
Abstract The profitability of carry trade is investigated using six currency combinations and historical data covering the period December 1999-June 2006. Hypothesis testing and Monte Carlo simulations produce results that cast doubt on the profitability of carry trade, as there is mostly a fifty-fifty chance that profit can be made from a single carry trade operation. The results also show that carry trade is not an exclusively yen-based operation, in the sense that currency combinations not involving the yen can be as profitable as combinations involving the yen. Because the interest rate differential is not the only factor determining the profitability of carry trade, a proper criterion for selecting the underlying positions must embody both the interest rate differential and exchange rate volatility. It is concluded that over-enthusiasm about carry trade is a reflection of herd behaviour.
Keyword(s) Carry Trade
Uncovered Interest Parity
ISSN 0012-981X
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