Carry Trade Strategies Based on Option-Implied Information: Evidence from a Cross-Section of Funding Currencies

Posted: 2 Mar 2018

Date Written: 2017

Abstract

We document carry trade returns based on the moments extracted from options on the underlying currencies. We establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter tails than the returns of other currency pairs. Second, strategies based on option-implied information improve on benchmark strategies based on realized market returns and macroeconomic data. Third, if the option-implied returns of a currency pair are more left-skewed than in the past, anti-carry trades rather than carry trades perform better.

Keywords: Carry Trade, Currency Options, Option-Implied Moments, Funding Currencies, Carry Trade Unwinding

JEL Classification: F31, G15

Suggested Citation

Chen, Shu-Hsiu, Carry Trade Strategies Based on Option-Implied Information: Evidence from a Cross-Section of Funding Currencies (2017). Journal of International Money and Finance, Vol. 78, 2017. Available at SSRN: https://ssrn.com/abstract=3123551

Shu-Hsiu Chen (Contact Author)

University of Houston ( email )

Houston, TX 77204
United States

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