Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T12:37:15.722Z Has data issue: false hasContentIssue false
  • English
  • Français

Currency Regimes and the Carry Trade

Published online by Cambridge University Press:  14 March 2019

Olivier Accominotti ,
Jason Cen ,
David Chambers  and
Ian W. Marsh
Get access Rights & Permissions [Opens in a new window]

Abstract

This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 5 , October 2019 , pp. 2233 - 2260
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Jennifer Conrad (the editor), an anonymous referee, Geert Bekaert, Giancarlo Corsetti, Phornchanok Cumperayot, Elroy Dimson, Will Goetzmann, Cam Harvey, Antti Ilmanen, Ron Liesching, Nikola Mirkov, Scott Murray, Carol Osler, Rich Payne, Raghu Rau, Lucio Sarno, Avanidhar Subrahmanyam, John Thanassoulis, and Adrien Verdelhan; seminar participants at Cambridge University, Cass Business School, Warwick Business School, and the Bank of England; and participants at the 2017 European Economic Association (EEA) Congress, the 2017 Northern Finance Association (NFA) Conference, the 2017 World Congress of Cliometrics, the 2017 INFINITI Conference on International Finance, the 2018 FTSE World Investment Forum, and the 2018 Financial Management Association (FMA) European Conference for helpful comments and suggestions. We also thank the sponsors of the 2018 FMA European Conference for their asset pricing best paper award. We are indebted to Cambridge University’s Centre for Endowment Asset Management (CEAM), Cambridge Endowment for Research in Finance (CERF), and London School of Economics’ Research Infrastructure and Investment Fund (RIIF) for financial support. We are grateful to Alain Naef for research assistance.

References

Accominotti, O., and Chambers, D.. “If You’re So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years.” Journal of Economic History, 76 (2016), 342–386.Google Scholar
Aldcroft, D. H., and Oliver, M. J.. Exchange Rate Regimes in the Twentieth Century. Cheltenham, UK: Edward Elgar (1998).Google Scholar
Atkin, J. The Foreign Exchange Market of London. New York, NY: Routledge (2005).Google Scholar
Bekaert, G., and Panayotov, G.. “Good Carry, Bad Carry.” Journal of Financial and Quantitative Analysis, forthcoming (2019).Google Scholar
Brunnermeier, M. K.; Nagel, S.; and Pedersen, L. H.. “Carry Trade and Currency Crashes.” NBER Macroeconomics Annual, 23 (2008), 313–347.Google Scholar
Burnside, C.; Eichenbaum, M.; Kleshchelski, I.; and Rebelo, S.. “Do Peso Problems Explain the Returns to the Carry Trade? ” Review of Financial Studies, 24 (2011a), 853–891.Google Scholar
Burnside, C.; Eichenbaum, M.; and Rebelo, S.. “Carry Trade and Momentum in Currency Markets.” Annual Review of Financial Economics, 3 (2011b), 511–535.Google Scholar
Cen, J., and Marsh, I. W.. “Foreign Exchange Trading Strategies and Rare Events.” Working Paper, Cass Business School (2016).Google Scholar
Chambers, D., and Dimson, E.. “IPO Underpricing over the Very Long Run.” Journal of Finance, 64 (2009), 1407–1443.Google Scholar
Chernov, M.; Graveline, J.; and Zviadadze, I.. “Crash Risk in Currency Returns.” Journal of Financial and Quantitative Analysis, 53 (2018), 137–170.Google Scholar
Christiansen, C.; Ranaldo, A.; and Söderlind, P.. “The Time-Varying Systematic Risk of Carry Trade Strategies.” Journal of Financial and Quantitative Analysis, 46 (2011), 1107–1125.Google Scholar
Clarke, P. Mr. Churchill’s Profession: Statesman, Orator, Writer. London, UK: Bloomsbury (2012).Google Scholar
Davis, J.; Fama, E. F.; and French, K.. “Characteristics, Covariances and Average Returns: 1929 to 1997.” Journal of Finance, 55 (2000), 389–406.Google Scholar
Dobrynskaya, V.“Downside Market Risk of Carry Trades.” Review of Finance, 18 (2014), 1885–1913.Google Scholar
Doskov, N., and Swinkels, L.. “Empirical Evidence on the Currency Carry Trade 1900–2012.” Journal of International Money and Finance, 51 (2015), 370–389.Google Scholar
Eichengreen, B. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press (1996).Google Scholar
Einzig, P. The Theory of Forward Exchange. London, UK: MacMillan (1937).Google Scholar
Farhi, E.; Fraiberger, S.; Ranciere, R.; and Verdelhan, A.. “Crash Risk in Currency Markets.” Working Paper, Harvard University (2013).Google Scholar
Farhi, E., and Gabaix, X.. “Rare Disasters and Exchange Rates.” Quarterly Journal of Economics, 131 (2016), 1–52.Google Scholar
Fratzscher, M.; Menkhoff, L.; Sarno, L.; Schmeling, M.; and Stoehr, T.. “Systematic Intervention and Currency Risk Premia.” Working Paper, Cass Business School (2018).Google Scholar
Hai, W.; Mark, N. C.; and Wu, Y.. “Understanding Spot and Forward Exchange Rate Regressions.” Journal of Applied Econometrics, 12 (1997), 715–734.Google Scholar
Hassan, T. A., and Mano, R. C.. “Forward and Spot Exchange Rates in a Multi-Currency World.” Quarterly Journal of Economics, 134 (2018), 397–450.Google Scholar
Ilzetzki, E. O.; Reinhart, C. M.; and Rogoff, K. S.. “Exchange Rate Arrangements into the 21st Century: Will the Anchor Currency Hold?” NBER Working Paper 23134 (2004).Google Scholar
James, H. Making the European Monetary Union. Cambridge, MA: Harvard University Press (2012).Google Scholar
Jones, C. S., and Pomorski, L.. “Investing in Disappearing Anomalies.” Review of Finance, 21 (2017), 237–267.Google Scholar
Jorion, P., and Goetzmann, W. N.. “Global Stock Markets in the Twentieth Century.” Journal of Finance, 54 (1999), 953–980.Google Scholar
Jurek, J. W.“Crash-Neutral Currency Carry Trades.” Journal of Financial Economics, 113 (2014), 325–347.Google Scholar
Keynes, J. M. A Tract on Monetary Reform. London, UK: Macmillan (1923).Google Scholar
Koijen, R. S.; Moskowitz, T. J.; Pedersen, L. H.; and Vrugt, E. B.. “Carry.” Journal of Financial Economics, 127 (2017), 197–225.Google Scholar
Lettau, M.; Maggiori, M.; and Weber, M.. “Conditional Risk Premia in Currency Markets and Other Asset Classes.” Journal of Financial Economics, 114 (2014), 197–225.Google Scholar
Lustig, H.; Roussanov, N.; and Verdelhan, A.. “Common Risk Factors in Currency Markets.” Review of Financial Studies, 24 (2011), 3731–3777.Google Scholar
Lustig, H.; Roussanov, N.; and Verdelhan, A.. “Countercyclical Currency Risk Premia.” Journal of Financial Economics, 111 (2014), 527–553.Google Scholar
Menkhoff, L.; Sarno, L.; Schmeling, M.; and Schrimpf, A.. “Carry Trades and Global Foreign Exchange Volatility.” Journal of Finance, 67 (2012), 681–718.Google Scholar
Miller, H. F. R. The Foreign Exchange Market: A Practical Treatise on Post-War Foreign Exchange, 2nd ed. London, UK: E. Arnold (1929).Google Scholar
Osler, C. L.“Market Microstructure and the Profitability of Currency Trading.” Annual Review of Finance and Economics, 4 (2012), 469–495.Google Scholar
Phillips, H. W. Modern Foreign Exchange and Foreign Banking. London, UK: Macdonald and Evans (1926).Google Scholar
Rafferty, B.“Currency Returns, Skewness and Crash Risk.” Working Paper, University of Melbourne (2012).Google Scholar
Ranaldo, A., and Söderlind, P.. “Safe Haven Currencies.” Review of Finance, 14 (2010), 385–407.Google Scholar
Reinhart, C. M., and Rogoff, K. S.. “From Financial Crash to Debt Crisis.” American Economic Review, 101 (2011), 1676–1706.Google Scholar
Shambaugh, J.“The Effects of Fixed Exchange Rates on Monetary Policy.” Quarterly Journal of Economics, 119 (2004), 301–352.Google Scholar
Supplementary material: File

Accominotti et al. supplementary material

Accominotti et al. supplementary material 1

Download Accominotti et al. supplementary material(File)
File 215.6 KB