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Out-of-Sample Evidence on the Returns to Currency Trading

50 Pages Posted: 15 Jul 2013 Last revised: 2 Dec 2015

Olivier Accominotti

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

David Chambers

University of Cambridge - Judge Business School, Department of Finance & Accounting

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Date Written: January 27, 2014

Abstract

We document the existence of excess returns to naïve currency trading strategies during the emergence of the modern foreign exchange market in the 1920s and 1930s. This era of active currency speculation constitutes a natural out-of-sample test of the performance of carry, momentum and value strategies well documented in the modern era. We find that the positive carry and momentum returns in currencies over the last thirty years are also present in this earlier period. In contrast, the returns to a simple value strategy are negative. In addition, we benchmark the rules-based carry and momentum strategies against the discretionary strategy of an informed currency trader: John Maynard Keynes. The fact that the strategies outperformed a superior trader such as Keynes underscores the outsized nature of their returns. Our findings are robust to controlling for transaction costs and, similar to today, are in part explained by the limits to arbitrage experienced by contemporary currency traders.

Suggested Citation

Accominotti, Olivier and Chambers, David, Out-of-Sample Evidence on the Returns to Currency Trading (January 27, 2014). Available at SSRN: https://ssrn.com/abstract=2293684 or http://dx.doi.org/10.2139/ssrn.2293684

Olivier Accominotti

London School of Economics & Political Science (LSE) ( email )

Economic History Department
Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

David Chambers (Contact Author)

University of Cambridge - Judge Business School, Department of Finance & Accounting ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44 (0)1223 339700 (Phone)

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