Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108145
Authors: 
Darvas, Zsolt
Year of Publication: 
2008
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2008/22
Abstract: 
Studying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.
Subjects: 
Bootstrap
Currency market
Diversification
Leverage
Uncovered interest rate parity
JEL: 
C32
F31
G11
G15
ISBN: 
978-963-9796-40-9
Document Type: 
Working Paper

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