Carry Trades and Monetary Conditions

30 Pages Posted: 19 Oct 2016  

Andrea Falconio

European Central Bank (ECB)

Date Written: October 4, 2016

Abstract

This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that consists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade average excess return, Sharpe ratio and 5% quantile differ substantially across expansive and restrictive conventional monetary policy before the onset of the recent financial crisis. By contrast, the considered parameters are not affected by unconventional monetary policy during the financial crisis.

Keywords: carry trade, volatility, monetary conditions

JEL Classification: F31, G15, E52

Suggested Citation

Falconio, Andrea, Carry Trades and Monetary Conditions (October 4, 2016). ECB Working Paper No. 1968. Available at SSRN: https://ssrn.com/abstract=2854134

Andrea Falconio (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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