Is carry trade a profitable strategy?

• Autor(a) principal: Candotto, Lorenzo
• Data de Publicação: 2019
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/29306
• topic: Carry trade; Currencies; Interest rate parity; Forward rates; Spot rates; Investment strategies; Empirical finance; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

Uncovered interest parity states that currencies selling at forward premium should appreciate while currencies selling at forward discount should depreciate. In reality the opposite happens, allowing a variety of speculation strategies in the currency markets. In this thesis we implement the carry trade with a sample of 32 currencies including both developed and emerging markets on a time span going from 1976 to 2018. We will show that these strategies offer high Sharpe Ratios even keeping in account the transaction costs. We will then try to explain the results with some equity, bond and forex markets factor models and see how the factors chosen leave unexplained most of the average returns of the carry trade. Finally, we will try to improve the one currency long versus one currency short carry trade, which presents huge drawdowns, by scaling it by volatility and show how this technique improves a lot the Sharpe Ratio of the carry trade.