Optimal currency carry trade strategies
Optimal currency carry trade strategies
This paper studies the optimal asset allocation problem of an investor with a portfolio given by the U.S. risk-free asset and a carry trade benchmark comprising the currencies of the G10 countries. Our optimal strategy is able to adapt to macroeconomic conditions and avoid the so-called crash risk inherent in standard carry trade strategies by constructing a vector of dynamic weights that depends on a set of state variables. We find that the U.S. Ted spread, the U.S. average forward discount, the CRB Industrial return, and a global monetary policy indicator are the key drivers of optimal currency carry trade strategies.
52-66
Laborda, J.
57414daf-714a-4774-8c31-ff76c4100b80
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
September 2014
Laborda, J.
57414daf-714a-4774-8c31-ff76c4100b80
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
Laborda, J., Laborda, R. and Olmo, J.
(2014)
Optimal currency carry trade strategies.
International Review of Economics and Finance, 33, .
(doi:10.1016/j.iref.2014.03.007).
Abstract
This paper studies the optimal asset allocation problem of an investor with a portfolio given by the U.S. risk-free asset and a carry trade benchmark comprising the currencies of the G10 countries. Our optimal strategy is able to adapt to macroeconomic conditions and avoid the so-called crash risk inherent in standard carry trade strategies by constructing a vector of dynamic weights that depends on a set of state variables. We find that the U.S. Ted spread, the U.S. average forward discount, the CRB Industrial return, and a global monetary policy indicator are the key drivers of optimal currency carry trade strategies.
Text
Optimal Currency Carry Trade Strategies final.pdf
- Accepted Manuscript
More information
Accepted/In Press date: 19 March 2014
e-pub ahead of print date: 27 March 2014
Published date: September 2014
Organisations:
Economics
Identifiers
Local EPrints ID: 369377
URI: http://eprints.soton.ac.uk/id/eprint/369377
ISSN: 1059-0560
PURE UUID: 3e7afb6f-710f-4c97-b9d4-3bc5412df407
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Date deposited: 02 Oct 2014 11:29
Last modified: 15 Mar 2024 03:46
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Author:
J. Laborda
Author:
R. Laborda
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