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Do Currency Fundamentals Matter for Currency Speculators?
Author:
Mr. Masahiro Nozaki
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Series:
IMF Working Papers
Volume/Issue:
Volume 2010: Issue 039
Language:
English
Publication Date:
01 Feb 2010
DOI:
https://doi.org/10.5089/9781451962864.001
ISBN:
9781451962864
ISSN:
1018-5941
Pages:
34
Keywords:
WP; carry trade strategy; Danish krone; pound sterling; currency speculation; carry trades; currency fundamentals; currency speculation strategy; Sharpe ratio; commodity-currency portfolio; currency carry trades; Currencies; Real effective exchange rates; Exchange rates; Exchange rate adjustments; Purchasing power parity; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The answer seems affirmative. We compare currency carry trades with an investment strategy based on currency fundamentals: taking a long (short) position in undervalued (overvalued) currencies. Carry trades have high risk-adjusted returns, but are subject to "crash risk." In contrast, the fundamental strategy has lower risk-adjusted returns, but is less prone to crash risk, because the realization of crash risk coincides with corrections towards fundamentals. In particular, the fundamental strategy outperformed carry trades during the recent global financial crisis. Building on these results, we present early warning indicators for potential turbulence in the currency market.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund