Working Paper: NBER ID: w16942
Authors: Craig Burnside; Martin S. 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: No keywords provided
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| covariance between payoffs of strategies and conventional risk factors (C10) | not statistically significant (C29) |
| 2008 financial crisis (F65) | cannot interpret as rare disaster for profitability of currency trading strategies (F31) |
| momentum strategies during 2008 crisis (E44) | yielded profits (D33) |
| price pressure in currency markets (F31) | could explain observed profitability (L21) |
| average payoffs (J33) | can be positive even if marginal trade is not profitable (F11) |
| rare disasters (H84) | moderate losses associated (G33) |
| rare disasters (H84) | do not significantly impact profitability of carry trade and momentum strategies (G19) |
| profitability of carry trade and momentum strategies (G15) | not merely compensation for risk (G19) |