Commodity Trade and the Carry Trade: A Tale of Two Countries
Robert C. Ready
University of Rochester - Simon Business School
Nikolai L. Roussanov
University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)
University of Minnesota
August 20, 2013
Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. "Commodity currencies'' tend to have high interest rates while low interest rate currencies belong to exporters of finished goods.This pattern arises in a complete-markets model with trade specialization and limited shipping capacity, whereby commodity-producing countries are insulated from global productivity shocks, which are absorbed by the final goods producers. Empirically, a commodity-based strategy explains a substantial portion of the carry-trade risk premia, and all of their pro-cyclical predictability with commodity prices and shipping costs, as predicted by the model.
Number of Pages in PDF File: 74
Keywords: currency risk premia, international trade, commodity markets, return predictability, Baltic Dry Index
JEL Classification: E44, F31, G15
Date posted: July 28, 2012 ; Last revised: August 24, 2013
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