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Carry Trade and Momentum in Currency Markets

Author

Listed:
  • Craig Burnside

    (Department of Economics, Duke University, Durham, North Carolina 27708-0097
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Martin Eichenbaum

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Department of Economics, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2600
    Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

  • Sergio Rebelo

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Department of Economics, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2600
    Center for Economic Policy Research, London, EC1V 3PZ, United Kingdom)

Abstract
We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We 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.

Suggested Citation

  • Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2011. "Carry Trade and Momentum in Currency Markets," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 511-535, December.
    • Handle: RePEc:anr:refeco:v:3:y:2011:p:511-535
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-102710-144913
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    Keywords

    uncovered interest parity; exchange rates; currency speculation; rare disaster; peso problem; price pressure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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