Benefits of Wavelet-Based Carry Trade Diversification

Research in International Business and Finance, 34, 17-32

Posted: 7 Mar 2014 Last revised: 17 Aug 2022

See all articles by Vitaly Orlov

Vitaly Orlov

University of St. Gallen - School of Finance; Swiss Finance Institute

Janne Jaakko Äijö

University of Vaasa, Department of Accounting and Finance

Date Written: 2015

Abstract

This study investigates carry trade diversification opportunities and linkages of major carry trade currencies on five different investment horizons. Using daily data on eight currencies and LIBOR rates, we examine the temporal structure of correlations and assess portfolio diversification benefits with wavelet techniques. Our results indicate that positive and economically significant carry trade excess returns are observed on all investigated investment horizons. We document that strategies built on the basis of wavelet correlation lead to significant diversification benefits. These findings indicate the importance of the dynamic structure of exchange rate correlations to currency arbitrage strategies.

Keywords: carry trade; wavelet analysis; carry trade diversification; financial crisis

JEL Classification: F31; G15

Suggested Citation

Orlov, Vitaly and Äijö, Janne Jaakko, Benefits of Wavelet-Based Carry Trade Diversification (2015). Research in International Business and Finance, 34, 17-32, Available at SSRN: https://ssrn.com/abstract=2405340 or http://dx.doi.org/10.2139/ssrn.2405340

Vitaly Orlov (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Janne Jaakko Äijö

University of Vaasa, Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa
Finland

HOME PAGE: http://www.uwasa.fi/~jja

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