Foreign exchange predictability during the financial crisis: Implications for carry trade profitability

Arbeitspapier

In this paper, we study the effectiveness of carry trade strategies during and after the financial crisis using a flexible approach to modeling currency returns. We decompose the currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability than raw returns. We allow the two components to respond to currency-specific risk factors and use the joint conditional distribution of these components to obtain forecasts of future carry trade returns. Our results suggest that the decomposition model produces higher forecast and directional accuracy than any of the competing models. We show that the forecasting gains translate into economically and statistically significant (risk-adjusted) profitability when trading individual currencies or forming currency portfolios based on the predicted returns from the decomposition model.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Working Paper ; No. 2015-6

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Foreign Exchange ; International Finance Forecasting and Simulation: Models and Applications ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Forecasting Models; Simulation Methods ; International Financial Markets
• Thema: exchange rate forecasting ; carry trade ; positions of traders ; return decomposition ; copula ; joint predictive distribution

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Anatolyev, Stanislav ; Gospodinov, Nikolay ; Jamali, Ibrahim ; Liu, Xiaochun
• Ereignis: Veröffentlichung
• (wer): Federal Reserve Bank of Atlanta
• (wo): Atlanta, GA
• (wann): 2015

Weitere Informationen

• Handle: http://hdl.handle.net/10419/130622
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ