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Volume 66, Issue 5

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US Dollar Carry Trades in the Era of “Cheap Money”

Erdos, Peter; Li, Youwei; Moore, Michael; Shehadeh, Ali

Year: 2016   Volume: 66   Issue: 5   Pages: 374-404

Abstract: In this paper, we employ a unique dataset of actual US dollar (USD) forward positions against a number of currencies taken by so-called commodity trading advisors (CTAs). We investigate the extent to which these positions exhibit a pattern of USD carry trading or other patterns of currency trading over the recent period of ultra-loose US monetary policy. Our analysis indeed shows that USD positions against emerging-market currencies are characterised by a pattern of carry trading. That is, the US dollar, as the lower-yielding currency, is associated with short positions. The payoff distributions of these positions, moreover, are found to have positive Sharpe ratios, negative skewness and high kurtosis. On the other hand, we find that USD positions against other developed-market currencies have a pattern completely opposite to carry trading, which is in line with the uncovered interest parity trading; i.e. the lower-yielding (higher-yielding) currency is associated with long (short) positions.

JEL classification: F31, G11, G15

Keywords: commodity trading advisors (CTAs), foreign exchange rate, carry trade

RePEc: http://ideas.repec.org/a/fau/fauart/v66y2016i5p374-404.html

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