The Out-of-Sample Performance of Carry Trades

55 Pages Posted: 26 Apr 2018 Last revised: 20 Sep 2019

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

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: Sept 17, 2019

Abstract

We carry out a large-scale investigation of the out-of-sample profitability of in-sample profitable carry trade strategies, using foreign exchange data for 48 countries spanning a period from 1983 to 2015 and employing reality check and stepwise tests to correct for data-snooping bias (the factor of luck in model selection). Carry trade strategies chosen as profitable in one period are generally not profitable in an ensuing out-of-sample sample period, especially after correcting for data-snooping, and even after allowing for learning and stop-loss strategies. Any evidence of consistency in carry trade profitability that is found is concentrated in a relatively brief historical period, 2001-2005. We further investigate particular currency pairs that may drive the out-of-sample profitability during this period, and find their performance to be unstable in general. Our findings thus highlight the instability and the factor of luck in generating profits from carry trades.

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 Out-of-Sample Performance of Carry Trades (Sept 17, 2019). Available at SSRN: https://ssrn.com/abstract=3158101 or http://dx.doi.org/10.2139/ssrn.3158101

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
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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