Working Paper: CEPR ID: DP8343
Authors: Craig Burnside; Martin Eichenbaum; Sergio Rebelo
Abstract: We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.
Keywords: exchange rates; forward rates; uncovered interest parity
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| profitability of carry trade and momentum strategies (G15) | lack of statistically significant covariance between payoffs and risk factors (D81) |
| lack of statistically significant covariance between payoffs and risk factors (D81) | observed profitability does not simply reflect risk compensation (G19) |
| rare disasters or peso problems (H84) | observed profitability (L21) |
| 2008 financial crisis (F65) | profitability of momentum strategy (G11) |
| price pressure in currency markets (F31) | observed profitability (L21) |
| observed average payoffs can remain positive despite marginal trade not being profitable (F16) | price pressure in currency markets (F31) |