The Profitability of Carry Trades: Reality or Illusion?
76 Pages Posted: 26 Apr 2018
Date Written: April 7, 2018
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: Suggested Citation