The Out-of-Sample Performance of Carry Trades

56 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

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); Brookings Institution

Zigan Wang

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

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: carry trade, Data-snooping bias, foreign exchange

JEL Classification: C53, F31, G15

Suggested Citation

Hsu, Po-Hsuan and Taylor, Mark P. and Wang, Zigan, The Out-of-Sample Performance of Carry Trades (July 2020). CEPR Discussion Paper No. DP15052, Available at SSRN: https://ssrn.com/abstract=3661395

Po-Hsuan Hsu (Contact Author)

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

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

Mark P. Taylor

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

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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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