DP8343 Carry Trade and Momentum in Currency Markets

Author(s): Craig Burnside, Martin Eichenbaum, Sérgio Rebelo
Publication Date: April 2011
Keyword(s): Exchange rates, forward rates, uncovered interest parity
JEL(s): F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8343

We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.