Business Intelligence

Carry Trade And Momentum In Currency Markets

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Executive Summary

The authors examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. They review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets. In this paper, they examine the empirical properties of the payoffs to two currency speculation strategies: the carry trade and momentum. They then assess the plausibility of the theories proposed in the literature to explain the profitability of these strategies.

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