Still Crazy after All These Years: The Returns on Carry Trade

35 Pages Posted: 8 Feb 2016

See all articles by Emilio Colombo

Emilio Colombo

Catholic University of the Sacred Heart of Milan

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law

Roberto Rossignoli

MONEYFARM

Date Written: February 7, 2016

Abstract

This paper proposes a novel approach to provide directional forecasts for carry trade strategies; this approach is based on Support VectorMachines (SVM), a Learning algorithm which delivers extremely promising results. Building on recent findings of the literature on carry trade we condition the SVM on indicators of uncertainty and risk; we show that this provides a dramatic improvement of the performance of the strategy, in particular during periods of financial distress such as the recent financial crises. Disentangling between measures of risk we show that the best performances are obtained by conditioning the SVM on measures of liquidity risk rather than on market volatility.

Keywords: Carry trade, Support Vector Machines, market volatility

JEL Classification: .

Suggested Citation

Colombo, Emilio and Forte, Gianfranco and Rossignoli, Roberto, Still Crazy after All These Years: The Returns on Carry Trade (February 7, 2016). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 327. Available at SSRN: https://ssrn.com/abstract=2728990 or http://dx.doi.org/10.2139/ssrn.2728990

Emilio Colombo (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law ( email )

Edificio U7, IV piano
via Bicocca degli Arcimboldi
Milan, MI 8 - 20126
Italy

Roberto Rossignoli

MONEYFARM ( email )

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