Currency Carry Trade Over the Long Run
January 8, 2015 - Currency Trading
Does the currency carry trade, financing short-term deposits in currencies with high interest rates with short-term loans in currencies with low interest rates (or being long and short forward contracts in currencies with high and low interest rates) generate a reliably attractive return? In the November 2014 version of their paper entitled “Empirical Evidence on the Currency Carry Trade, 1900-2012”, Nikolay Doskov and Laurens Swinkels measure annual nominal and real carry trade returns for a large sample of currencies over a long period covering multiple currency regimes. They use yields on local Treasury bills (T-bills) or equivalents to approximate short-term interest rates and make some adjustments to account for government defaults. To estimate carry trade returns, they sort currencies each year based on associated T-bill yields and take equally weighted long (short) positions in the four currencies with the highest (lowest) yields. Using annual exchange rates and associated T-bill yields for 20 currencies during 1900 through 2012 (19 currencies before 1925 and 12 currencies after 1998), they find that: Keep Reading