Business Intelligence

Detecting Crowded Trades In Currency Funds

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Executive Summary

The financial crisis of 2008 highlights the importance of detecting crowded trades due to the risks they pose to the stability of the financial system and to the global economy. However, there is a perception that crowded trades are difficult to identify. To date, no single measure to capture the crowdedness of a trade or a trading style has developed. The authors propose a methodology to measure crowded trades and apply it to professional currency managers. The results suggest that carry became a crowded trading strategy towards the end of Q1 2008, shortly before a massive liquidation of carry trades.

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