Currency Regimes and the Carry Trade

Journal of Financial and Quantitative Analysis, Forthcoming

72 Pages Posted: 29 Nov 2017 Last revised: 3 Mar 2019

See all articles by Olivier Accominotti

Olivier Accominotti

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Jason Cen

University of Essex - Essex Business School

David Chambers

University of Cambridge - Judge Business School, Department of Finance & Accounting

Ian W. Marsh

City University London - Sir John Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2019

Abstract

This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.

Keywords: Exchange rates, Carry strategy, Currency factors, Floating currencies

JEL Classification: F31, G12

Suggested Citation

Accominotti, Olivier and Cen, Jason and Chambers, David and Marsh, Ian William, Currency Regimes and the Carry Trade (February 19, 2019). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3077029 or http://dx.doi.org/10.2139/ssrn.3077029

Olivier Accominotti

London School of Economics & Political Science (LSE) ( email )

Economic History Department
Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jason Cen

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

David Chambers (Contact Author)

University of Cambridge - Judge Business School, Department of Finance & Accounting ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44 (0)1223 339700 (Phone)

Ian William Marsh

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

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