Working Paper: CEPR ID: DP13571
Authors: Olivier Accominotti; Jason Cen; David Chambers; Ian W. Marsh
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.
Keywords: exchange rate regime; carry trade
JEL Codes: F31; G12; G15; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts from fixed to floating regimes (F31) | negative returns in carry strategies based on floating currencies (G15) |
| breakdown of currency pegs (F31) | significant losses in floating carry trades (F31) |
| outsized carry returns occur exclusively in floating currency regimes (F31) | zero carry returns observed in fixed regimes (G12) |