The Profitability of Carry Trades: Reality or Illusion?

76 Pages Posted: 26 Apr 2018

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

University of Hong Kong

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR)

Zigan Wang

The University of Hong Kong - School of Economics and Finance; Columbia University

Date Written: April 7, 2018

Abstract

We carry out a large-scale investigation of the profitability of carry trades, using foreign exchange data for 48 countries spanning a period from 1983 to 2016 and employing a stepwise test to counter data-snooping bias. We find that, while we can confirm previous findings that the carry trade is profitable over this long period when a specific carry-trade strategy is selected based on the whole data set, even after controlling for data snooping, when we split the sample into sub-periods, the best carry-trade strategy in one sub-period is generally not profitable in the next sub-period. This finding holds true even when we include learning strategies and stop-loss strategies. Our findings thus highlight the instability of carry trades over long periods and their limitation in the sense that it is hard to predict their performance based on several years of data and therefore to choose a profitable carry-trade strategy ex ante.

Keywords: Foreign Exchange; Trading Rules; Carry Trade; Data-Snooping Bias

JEL Classification: F31; C53; G15

Suggested Citation

Hsu, Po-Hsuan and Taylor, Mark Peter and Wang, Zigan, The Profitability of Carry Trades: Reality or Illusion? (April 7, 2018). Available at SSRN: https://ssrn.com/abstract=3158101 or http://dx.doi.org/10.2139/ssrn.3158101

Po-Hsuan Hsu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Mark Peter Taylor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zigan Wang

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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