Leveraged carry trade portfolios |
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Authors: | Zsolt Darvas |
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Institution: | Institute of Economics of the Hungarian Academy of Sciences, Corvinus University of Budapest, Budaörsi út 45, 1112 Budapest, Hungary |
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Abstract: | Studying all possible pairs of 11 major currencies and 11 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. |
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Keywords: | C32 F31 G11 G15 |
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