VoxEU Column International Finance

The returns to currency speculation: Evidence from Keynes the trader

John Maynard Keynes traded currencies using a discretionary and fundamentals-based strategy. This column shows that he underperformed rules-based carry, momentum and value strategies. The returns to these strategies in the 1920s and 1930s were time-varying and are in part explained by the contemporary limits to arbitrage. The excess returns might also represent compensation for exposure to the considerable macroeconomic volatility of the time.

Until recently, economists thought that currency trading was a zero sum game and that the expected return to currency speculation was zero. Yet recent research has shown that simple, rules-based currency trading strategies have proven very profitable over the last thirty years. These strategies are:

  • Carry trade, which borrows in low interest rate currencies and invests in high interest rate currencies (Lustig and Verdelhan 2007, Burnside et al. 2011, Menkhoff et al. 2012a, Jorda and Taylor 2011);
  • Momentum, which buys past winners and shorts past losers (Menkhoff et al. 2012b); and
  • Value, which buys undervalued currencies relative to purchasing power parity and shorts overvalued currencies (Jorda and Taylor 2011, Asness et al. 2013).

The profitability of these naïve, zero-cost currency trading strategies constitutes a challenge to finance theory, contradicting both the efficient market hypothesis and the uncovered interest parity condition.

Currency speculation in the 1920s and 1930s

All evidence on the returns to currency trading strategies is based on currency markets since the end of Bretton Woods in the 1970s. There has been no study of the returns to currency speculation across different time periods.

In our recent research we explore the returns to currency trading in another era of pronounced exchange rate volatility: the 1920s and 1930s (Accominotti and Chambers 2014). These two decades of active currency trading constitute a natural out-of-sample test of the performance of those currency strategies well-documented in the modern era. Beginning in 1919, a large-scale forward currency market emerged in London enabling investors for the first time to trade currencies with the same instruments used in modern exchanges. Moreover, the economic backdrop of the 1920s and 1930s was markedly different to that of the post-Bretton Woods period. Compared to the relatively benign conditions of the Great Moderation up to 2008, the interwar years exhibited considerable macroeconomic volatility, providing a substantial challenge to the floating exchange rate (1920-1927), gold standard (1928-1931), and managed floating (1931-1939) regimes alike.

Does this out-of-sample period provide confirmation of the high returns to these naïve currency investment strategies?

  • Having compiled a detailed data set of month-end forward foreign exchange bid and ask quotations for all major currencies in the 1920s and 1930s, we first explore the returns to carry, momentum, and value strategies.
  • Second, we compare the returns to these rules-based strategies with the strategy of a sophisticated currency trader of the period: John Maynard Keynes.

Well-known for his contributions to exchange rate theory, Keynes was also an active currency trader during the 1920s and 1930s. He made full use of the newly-emerged forward market to bet on the evolution of spot exchange rates. Keynes’ strategy provides us with a suitable benchmark for the rules-based currency strategies for two reasons. First, he was an informed trader and an expert on currency markets. Evidence of his success as a stock investor also suggests he had superior trading skills (Chambers, Dimson, and Foo 2013). Second, Keynes’ currency strategy was discretionary and fundamentals-based, and orthogonal to the rules-based carry, momentum, and value strategies. Using archival data on his currency trading, we for the first time provide a detailed analysis of his strategy and performance.

Carry, momentum, and value strategies in the 1920s and 1930s

Our first main finding is that the outsized returns to the carry and momentum trading strategies present today also exist in the 1920-39 period. Returns to the value strategy were on the other hand consistently poor. Over the whole period, carry and momentum strategies generated mean annualized excess returns of 10.11% and 12.47% respectively, and Sharpe ratios of 0.57 and 0.63. These findings are robust to controlling for transaction costs, which account for no more than one-third of the gross excess returns to carry and momentum. Figure 1 displays the cumulative log excess returns of carry and momentum strategies over the entire period 1920-39 against those on UK stocks. Both strategies generated particularly high returns in the 1920s, relative to contemporary stocks and bonds and to the same currency strategies in the 1990s and 2000s.

Figure 1. Cumulative excess returns to carry and momentum

Notes: The graph shows the cumulative log excess returns (%) on the DMS UK equity index and on the CARRY and MOM1 strategies (before transaction costs) from end December 1919 until July 1939. Source: authors’ computations (see text).

Keynes’ currency trading strategy

By contrast, we find no evidence that Keynes followed any of the carry or momentum strategies. His writings indicate that his currency trading was based on a discretionary analysis of macro-economic fundamentals such as expected changes in official interest rates, the inflation outlook, and the level of European reparations and international capital flows. Keynes also leveraged his contacts when forming his currency views. His correspondence reveals that he attempted to exploit information gleaned during his meetings with diplomats, bankers, and stakeholders involved in important currency discussions.

Figure 2 displays the breakdown of Keynes’ monthly positions into long (+) and short (-) positions by individual currency during the two periods he traded actively: 1919-1927 and 1932-1939.

Figure 2. Keynes’ long and short portfolios in £, 1919-39

Notes: The bars describe the long (+) and short (-) positions, marked-to-market in sterling pounds, of all currencies traded by Keynes from August 1919 to May 1927 and from October 1932 to March 1939. The GBP position is equivalent to his net long or short position in all other currencies. Sources: authors’ computations (see text).

Consistent with his concerns about the performance of European economies and currencies struggling under the reparations burden, he constantly shorted the French franc (FRF), German mark (DEM) and Italian lira (ITL) from 1919 to 1925. In 1932-1939, he mainly traded in the US dollar (USD) where he alternated between short and long positions. Having shorted the dollar in October 1932-February 1933, he closed his position on 2 March 1933, just eight days before the suspension of US dollar gold convertibility. He then went long the dollar between April and June 1933 only to see the currency depreciate. His other trades were short positions in the French franc (FRF) and the Dutch florin (NLG) from mid-1933 until these currencies were devalued in September 1936. Overall, there was little overlap between Keynes’ currency positions and those consistent with carry, momentum and value strategies.

The expert vs. the rule

Given he was informed and among the first to understand the new forward exchange market, Keynes ought to have been well placed to succeed as a currency trader. Was he able to beat the naive carry and momentum strategies?

Over the whole period he traded during the 1920s and 1930s, we estimate Keynes achieved a considerably lower average return (5.37%) and Sharpe ratio (0.16) than both carry and momentum. This underperformance was mostly concentrated in the 1920s. In the 1930s, he managed to beat the carry trade but still unperformed the momentum strategy and was unable to match the returns on UK stocks and bonds.


The fact that such an informed and expert trader as John Maynard Keynes failed to match the returns to naïve carry and momentum strategies further underscores the puzzling nature of the outsized payoffs to these strategies. The recent literature has proposed several explanations for the performance of these strategies in the post-Bretton Woods period. We present evidence to suggest that, similar to today, the returns to these strategies in the 1920s and 1930s are time-varying and are in part explained by the limits to arbitrage experienced by contemporary currency traders. We also provide evidence that the excess returns to the carry strategy might represent compensation to investors for their exposure to the considerable macroeconomic volatility of the 1920s and 1930s. 


Accominotti, Olivier and David Chambers (2014), “Out-of-Sample Evidence on the Returns to Currency Trading”, CEPR Discussion Paper No. 9852, available at: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9852#

Asness, Clifford S., Tobias J. Moskowitz, and Lasse Heje Pedersen (2013), “Value and Momentum Everywhere”, The Journal of Finance, vol. 68, pp. 929-985.

Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo (2010), “Do Peso Problems Explain the Returns to the Carry Trade”, Review of Financial Studies, vol. 24, pp. 853-891.

Chambers, David, Elroy Dimson and Justin Foo (2013), “Keynes the Stock Market Investor: A Quantitative Analysis” Journal of Financial and Quantitative Analysis (Forthcoming), available at http://ssrn.com/abstract=2023011

Jorda, Oscar, and Alan M. Taylor (2011), “Performance Evaluation of Zero Net-Investment Strategies”, NBER Working Paper No 17150, June 2011.

Lustig, Hanno, and Adrien Verdelhan (2007), “The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk”, The American Economic Review, vol. 97, pp. 89-117.

Menkhoff, Lukas, Lucio Sarno, Maik Schmeling and Andreas Schrimpf (2012a), “Carry Trades and Global Foreign Exchange Volatility”, Journal of Finance, vol. 67, pp. 681-718. Vox column: http://www.voxeu.org/article/risk-carry-trades

Menkhoff, Lukas, Lucio Sarno, Maik Schmeling and Andreas Schrimpf (2012b), “Currency Momentum Strategies”, Journal of Financial Economics, vol. 106, pp. 660-684. Vox column: http://www.voxeu.org/article/limits-currency-momentum-trading

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