A Statistical Analysis of Carry Trading
19 Pages Posted: 29 Jun 2017 Last revised: 25 Dec 2018
Date Written: June 9, 2017
Carry trading is one of the most popular currency trading strategies. The aim of this paper is to apply and analyze the approach described in Baz et al. (2015) by utilizing the G10 currency cross rates and the 3-month Libor rates. The carry trading strategy is well documented and widely used by several types of market participants. In a first step, the strategy is tested with generated data based on the CHF/USD currency pair and the carry signal is being analyzed. In a second step, the strategy was applied to a basket of 45 currency pairs consisting of all the possible combinations between the G10 currencies. The outcome shows that carry trading can be protable if traded under the right market conditions, which are stable interest rates and an appreciation of the traded currency cross rate. The Deutsche Bank Currency Harvest Index, which is a similar implementation of a carry trading strategy outbids the approach by Baz et al. (2015) for the analyzed time period.
Keywords: carry, carry trading, currency markets, exchange rates, currency speculation
JEL Classification: F31, G15, G00
Suggested Citation: Suggested Citation