Boosting Carry with Equilibrium Exchange Rate Estimates
41 Pages Posted: 27 Sep 2022
Date Written: September, 2022
We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies.
Keywords: carry trade, equilibrium exchange rate, trading strategies
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation