Unexploited currency carry trade profit opportunity

摘要

In this paper, we find a significant amount of profit opportunities unexploited by conventional currency carry trade strategies. To find the unexploited profit opportunities, we propose a new currency carry trade strategy to exploit differential predictive capacity of forward discounts on future currency excess returns. We also find that emerging market currencies provide relatively large profit opportunities. While both strategies show decreasing carry trade profits as FX markets get volatile, the relative outperformance of the new carry trade strategy tends to be found in stable periods but disappears in volatile periods. The superiority of the new method relative to the conventional one is robust to various specification changes. (C) 2018 Elsevier B.V. All rights reserved.