DP13571 Currency Regimes and the Carry Trade

Author(s): Olivier Accominotti, Jason Cen, David Chambers, Ian W Marsh
Publication Date: March 2019
Keyword(s): carry trade, Exchange Rate Regime
JEL(s): F31, G12, G15, N20
Programme Areas: Financial Economics, Economic History, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13571

This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.