Off the Golden Fetters: Examining Interwar Carry Trade and Momentum

60 Pages Posted: 23 Nov 2013

See all articles by Jason Cen

Jason Cen

University of Exeter Business School

Ian W. Marsh

City University London - The Business School

Date Written: November 22, 2013

Abstract

We study the properties of carry trade and momentum returns in the interwar period, 1921:1-1936:12. We find that currencies with higher interest rates outperform currencies with lower interest rates by about 7% per annum, consistent with estimates from modern samples, while a momentum strategy that is long past winner and short past loser currencies rewards an average annual excess return of around 7% in the interwar sample, larger than its modern counterparts. On the grounds that the interwar period represents rare events better than modern samples, we provide evidence unfavorable to the rare disaster based explanation for the returns to the carry trade and momentum. Global FX volatility risk, however, turns out to account for the carry trade return in the interwar sample as well as in modern samples.

Keywords: Interwar, Carry, Momentum, Risk Premia, Rare Disasters, FX Volatility Risk

JEL Classification: G12, G15, F31

Suggested Citation

Cen, Jason and Marsh, Ian William, Off the Golden Fetters: Examining Interwar Carry Trade and Momentum (November 22, 2013). Available at SSRN: https://ssrn.com/abstract=2358456 or http://dx.doi.org/10.2139/ssrn.2358456

Jason Cen (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Ian William Marsh

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

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