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

59 Pages Posted: 30 Aug 2013 Last revised: 7 Sep 2013

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: August 2013

Abstract

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.

Suggested Citation

Ready, Robert C. and Roussanov, Nikolai L. and Ward, Colin, Commodity Trade and the Carry Trade: A Tale of Two Countries (August 2013). NBER Working Paper No. w19371. Available at SSRN: https://ssrn.com/abstract=2318274

Robert C. Ready (Contact Author)

University of Oregon - Department of Finance ( email )

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

Nikolai L. Roussanov

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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