Working Paper: CEPR ID: DP9852
Authors: Olivier Accominotti; David Chambers
Abstract: We document the existence of excess returns to naïve currency trading strategies during the emergence of the modern foreign exchange market in the 1920s and 1930s. This era of active currency speculation constitutes a natural out-of-sample test of the performance of carry, momentum and value strategies well documented in the modern era. We find that the positive carry and momentum returns in currencies over the last thirty years are also present in this earlier period. In contrast, the returns to a simple value strategy are negative. In addition, we benchmark the rules-based carry and momentum strategies against the discretionary strategy of an informed currency trader: John Maynard Keynes. The fact that the strategies outperformed a superior trader such as Keynes underscores the outsized nature of their returns. Our findings are robust to controlling for transaction costs and, similar to today, are in part explained by the limits to arbitrage experienced by contemporary currency traders.
Keywords: Carry Trade; Currency Trading Strategies; Keynes; Momentum; Value
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 |
|---|---|
| naive currency trading strategies (carry and momentum) (F31) | outsized returns during the 1920s and 1930s (N22) |
| carry strategy (L10) | particularly high returns in the 1920s (N22) |
| value strategy (D46) | underperformance compared to carry and momentum strategies (G41) |
| transaction costs (D23) | limits to arbitrage (G19) |
| limits to arbitrage (G19) | observed excess returns (G11) |
| naive strategies (C72) | challenge to traditional finance theories (G40) |