Abstract

https://ssrn.com/abstract=2118239
 
 

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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)

Colin Ward


University of Minnesota - Carlson School of Management

February 1, 2017

Journal of Finance, Forthcoming

Abstract:     
Persistent interest rate differentials account for much of the currency carry trade profitability. "Commodity currencies" offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model domestic production insulates commodity-producing countries from global productivity shocks, forcing final-good producers to absorb them. Commodity-currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

Number of Pages in PDF File: 76

Keywords: currency risk premia, international trade, commodity markets, return predictability, Baltic Dry Index

JEL Classification: E44, F31, G15


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Date posted: July 28, 2012 ; Last revised: February 13, 2017

Suggested Citation

Ready, Robert C. and Roussanov, Nikolai L. and Ward, Colin, Commodity Trade and the Carry Trade: A Tale of Two Countries (February 1, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2118239 or http://dx.doi.org/10.2139/ssrn.2118239

Contact Information

Robert C. Ready
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States

Nikolai L. Roussanov (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Colin Ward
University of Minnesota - Carlson School of Management ( email )
Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
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