Carry trades, momentum trading and the forward premium anomaly

This paper examines the role of carry trade and momentum trading strategies and their implications for the magnitude of the forward premium anomaly. The formal analysis uses a logistic smooth transition regression, with transition variables related to the different currency trading strategies. The h...

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Bibliographic Details
Published inJournal of financial markets (Amsterdam, Netherlands) Vol. 14; no. 3; pp. 441 - 464
Main Authors Baillie, Richard T., Chang, Sanders S.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.08.2011
Elsevier
SeriesJournal of Financial Markets
Subjects
Currency trading strategies
Currency trading strategies Uncovered interest parity Forward premium anomaly Nonlinearity LSTR models
Forward premium anomaly
LSTR models
Nonlinearity
Uncovered interest parity
Forward premium anomaly
C22
Currency trading strategies
F31
Uncovered interest parity
Nonlinearity
LSTR models
G15
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Summary:This paper examines the role of carry trade and momentum trading strategies and their implications for the magnitude of the forward premium anomaly. The formal analysis uses a logistic smooth transition regression, with transition variables related to the different currency trading strategies. The hypothesis of uncovered interest parity is found to hold in an upper regime where carry trades appear profitable on the basis of interest differentials and where exchange rate volatility is high.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2011.01.001