Abstract

https://ssrn.com/abstract=2692761
 


 



Foreign Exchange Predictability During the Financial Crisis: Implications for Carry Trade Profitability


Stanislav Anatolyev


New Economic School; CERGE-EI

Nikolay Gospodinov


Federal Reserve Bank of Atlanta

Ibrahim Jamali


American University of Beirut

Xiaochun Liu


University of Central Arkansas

August 1, 2015

FRB Atlanta Working Paper 2015-6

Abstract:     
In this paper, we study the effectiveness of carry trade strategies during and after the financial crisis using a flexible approach to modeling currency returns. We decompose the currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability than raw returns. We allow the two components to respond to currency-specific risk factors and use the joint conditional distribution of these components to obtain forecasts of future carry trade returns. Our results suggest that the decomposition model produces higher forecast and directional accuracy than any of the competing models. We show that the forecasting gains translate into economically and statistically significant (risk-adjusted) profitability when trading individual currencies or forming currency portfolios based on the predicted returns from the decomposition model.

Number of Pages in PDF File: 30

Keywords: exchange rate forecasting, carry trade, positions of traders, return decomposition, copula, joint predictive distribution

JEL Classification: F31, F37, C32, C53, G15


Open PDF in Browser Download This Paper

Date posted: November 20, 2015  

Suggested Citation

Anatolyev, Stanislav and Gospodinov, Nikolay and Jamali, Ibrahim and Liu, Xiaochun, Foreign Exchange Predictability During the Financial Crisis: Implications for Carry Trade Profitability (August 1, 2015). FRB Atlanta Working Paper 2015-6. Available at SSRN: https://ssrn.com/abstract=2692761

Contact Information

Stanislav A. Anatolyev
New Economic School ( email )
47 Nakhimovsky Prospekt
Moscow, 117418
Russia
CERGE-EI ( email )
P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
Nikolay Gospodinov (Contact Author)
Federal Reserve Bank of Atlanta ( email )
Atlanta, GA 30309
United States
HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1
Ibrahim Jamali
American University of Beirut ( email )
Xiaochun Liu
University of Central Arkansas ( email )
Conway, AR 72035-0001
United States
Feedback to SSRN


Paper statistics
Abstract Views: 492
Downloads: 81
Download Rank: 240,211