Published online by Cambridge University Press: 14 March 2019
This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.
We thank Jennifer Conrad (the editor), an anonymous referee, Geert Bekaert, Giancarlo Corsetti, Phornchanok Cumperayot, Elroy Dimson, Will Goetzmann, Cam Harvey, Antti Ilmanen, Ron Liesching, Nikola Mirkov, Scott Murray, Carol Osler, Rich Payne, Raghu Rau, Lucio Sarno, Avanidhar Subrahmanyam, John Thanassoulis, and Adrien Verdelhan; seminar participants at Cambridge University, Cass Business School, Warwick Business School, and the Bank of England; and participants at the 2017 European Economic Association (EEA) Congress, the 2017 Northern Finance Association (NFA) Conference, the 2017 World Congress of Cliometrics, the 2017 INFINITI Conference on International Finance, the 2018 FTSE World Investment Forum, and the 2018 Financial Management Association (FMA) European Conference for helpful comments and suggestions. We also thank the sponsors of the 2018 FMA European Conference for their asset pricing best paper award. We are indebted to Cambridge University’s Centre for Endowment Asset Management (CEAM), Cambridge Endowment for Research in Finance (CERF), and London School of Economics’ Research Infrastructure and Investment Fund (RIIF) for financial support. We are grateful to Alain Naef for research assistance.