Carry trade: The gains of diversification

Craig Burnside*, Martin Eichenbaum, Sergio Rebelo

*Corresponding author for this work

Research output: Contribution to journalArticle

25 Scopus citations

Abstract

Market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%.

Original languageEnglish (US)
Pages (from-to)581-588
Number of pages8
JournalJournal of the European Economic Association
Volume6
Issue number2-3
DOIs
StatePublished - Apr 1 2008

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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