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Carry and trend strategies in FX markets

Author

Listed:
  • Ueli Mettler

    (C-ALM AG)

  • Markus Thöny
  • Hansjörg Schmidt

Abstract

This article addresses the profitability of Carry and Trend strategies for the 12 most liquid FX markets. While the Carry strategy tries to exploit the forward premium anomaly by buying high-interest currencies and selling low-interest currencies, the herein applied Trend rule buys the outperformers and sells the underperformers in the considered FX universe. Unlike the empirical literature in this field, which evaluates trading rules sequentially for each currency pair, we form zero-investment multi-currency portfolios that are based on a consistent rating of each currency in the universe. The link between the desired long/short currency allocations and the required contract sizes in the available pairwise forward contracts is then accomplished by solving a constrained transaction cost minimization problem. We show that while the profitability of Carry strategies has been seriously hampered during the recent financial crisis, Trend strategies have celebrated an unexpected revival.

Suggested Citation

  • Ueli Mettler & Markus Thöny & Hansjörg Schmidt, 2010. "Carry and trend strategies in FX markets," Journal of Asset Management, Palgrave Macmillan, vol. 11(5), pages 321-331, December.
    • Handle: RePEc:pal:assmgt:v:11:y:2010:i:5:d:10.1057_jam.2010.18
    DOI: 10.1057/jam.2010.18
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    References listed on IDEAS

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    Cited by:

    1. Björn Uhl, 2024. "Sharpe-optimal volatility futures carry," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 288-302, May.
    2. Soumitra K Mallick, 2010. "Asset-based economy and management in emerging capital markets," Journal of Asset Management, Palgrave Macmillan, vol. 11(5), pages 309-313, December.

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    Keywords

    Carry; Trend; UIP; FX;
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