Commodity Trade and the Carry Trade: A Tale of Two Countries

76 Pages Posted: 28 Jul 2012 Last revised: 13 Feb 2017

See all articles by Robert C. Ready

Robert C. Ready

University of Oregon - Department of Finance

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Colin Ward

University of Minnesota - Carlson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2017

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.

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

JEL Classification: E44, F31, G15

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

Robert C. Ready

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
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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