Market Microstructure and the Profitability of Currency Trading

Posted: 4 Nov 2012

See all articles by Carol L. Osler

Carol L. Osler

Brandeis University - International Business School

Date Written: October 2012

Abstract

Currency trading is a vast and highly profitable business. This review examines the profitability of two popular currency trading strategies in light of currency-market microstructure research. The carry-trade strategy involves borrowing a low-interest currency and investing the proceeds in a high-interest currency. Technical trading strategies are determined exclusively on the basis of past asset prices and trading volumes. Under the efficient markets hypothesis, neither of these approaches to speculative trading should produce excess returns. The review shows that the profitability of carry-trade investing and technical trading strategies can represent rational long-run equilibria given the structure of currency markets and the incentives and constraints faced by traders.

Suggested Citation

Osler, Carol L., Market Microstructure and the Profitability of Currency Trading (October 2012). Annual Review of Financial Economics, Vol. 4, pp. 469-495, 2012. Available at SSRN: https://ssrn.com/abstract=2170921 or http://dx.doi.org/10.1146/annurev-financial-110311-101726

Carol L. Osler (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-4826 (Phone)

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