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Title: The Out-of-Sample Performance of Carry Trades

Author(s): Po-Hsuan Hsu, Mark P Taylor and Zigan Wang

Publication Date: July 2020

Keyword(s): carry trade, Data-snooping bias and foreign exchange

Programme Area(s): International Macroeconomics and Finance

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.

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Bibliographic Reference

Hsu, P, Taylor, M and Wang, Z. 2020. 'The Out-of-Sample Performance of Carry Trades'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15052