Take Action

Home | Faculty & Research Overview | Research

Research Details

The Returns to Currency Speculation in Emerging Markets, American Economic Review, Papers & Proceedings

Abstract

The carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market.

Type

Article

Author(s)

Craig Burnside, Martin S. Eichenbaum, Sergio Rebelo

Date Published

2007

Citations

Burnside, Craig, Martin S. Eichenbaum, and Sergio Rebelo. 2007. The Returns to Currency Speculation in Emerging Markets. American Economic Review, Papers & Proceedings.(2): 333-338.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more