Boosting Carry with Equilibrium Exchange Rate Estimates

41 Pages Posted: 27 Sep 2022

See all articles by Michał Rubaszek

Michał Rubaszek

Warsaw School of Economics (SGH)

Joscha Beckmann

FernUniversität in Hagen; Kiel Institute for the World Economy

Michele Ca’ Zorzi

European Central Bank (ECB)

Marek Kwas

Warsaw School of Economics (SGH)

Date Written: September, 2022

Abstract

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

Rubaszek, Michał and Beckmann, Joscha and Ca’ Zorzi, Michele and Kwas, Marek, Boosting Carry with Equilibrium Exchange Rate Estimates (September, 2022). ECB Working Paper No. 2022/2731, Available at SSRN: https://ssrn.com/abstract=4230681 or http://dx.doi.org/10.2139/ssrn.4230681

Michał Rubaszek (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Joscha Beckmann

FernUniversität in Hagen ( email )

Universitätsstrasse 41
Feithstrathe 140
Hagen, 58084
Germany

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Michele Ca’ Zorzi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marek Kwas

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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