Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269138 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2731
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies.
Subjects: 
Equilibrium Exchange Rate
Carry Trade
Trading strategies
JEL: 
F31
G12
G15
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5318-4
Document Type: 
Working Paper

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