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The profitability of carry trades

The profitability of carry trades
The profitability of carry trades
The uncovered interest parity (UIP) condition suggests that carry trades whereby investors borrowin the lowinterest rate currency and invest in the high interest rate currency should not result in excess profits over the long run. In this paper, we test the significance of the conventional empirical failure of UIP condition. Using the four bilateral pound parities we fail to detect significant excess carry trade profits for the yen, euro and swiss franc–pound parities. The only parity for which the carry trade consistently makes excess profits is the dollar–pound parity. This result is somewhat surprising as this is the currency pair with the lowest interest rate differential
231-241
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Pilbeam, Keith
9a971256-9582-4b70-b6a8-bcafe7982218
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Pilbeam, Keith
9a971256-9582-4b70-b6a8-bcafe7982218

Olmo, Jose and Pilbeam, Keith (2009) The profitability of carry trades. Annals of Finance, 5 (2), 231-241. (doi:10.1007/s10436-008-0098-2).

Record type: Article

Abstract

The uncovered interest parity (UIP) condition suggests that carry trades whereby investors borrowin the lowinterest rate currency and invest in the high interest rate currency should not result in excess profits over the long run. In this paper, we test the significance of the conventional empirical failure of UIP condition. Using the four bilateral pound parities we fail to detect significant excess carry trade profits for the yen, euro and swiss franc–pound parities. The only parity for which the carry trade consistently makes excess profits is the dollar–pound parity. This result is somewhat surprising as this is the currency pair with the lowest interest rate differential

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10.1007%2Fs10436-008-0098-2_LI=true - Other
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Published date: March 2009
Organisations: Economics

Identifiers

Local EPrints ID: 348562
URI: http://eprints.soton.ac.uk/id/eprint/348562
DOI: doi:10.1007/s10436-008-0098-2
PURE UUID: ed7b0e56-335d-4a17-a675-a6f513c9a3c8
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

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Date deposited: 15 Feb 2013 10:32
Last modified: 15 Mar 2024 03:46

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Author: Jose Olmo ORCID iD
Author: Keith Pilbeam

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