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Commodity Trade and the Carry Trade: a Tale of Two Countries

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  • Robert Ready
  • Nikolai Roussanov
  • Colin Ward

Abstract

Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. "Commodity currencies'' tend to have high interest rates while low interest rate currencies belong to exporters of finished goods. This pattern arises in a complete-markets model with trade specialization and limited shipping capacity, whereby commodity-producing countries are insulated from global productivity shocks, which are absorbed by the final goods producers. Empirically, a commodity-based strategy explains a substantial portion of the carry-trade risk premia, and all of their pro-cyclical predictability with commodity prices and shipping costs, as predicted by the model.

Suggested Citation

  • Robert Ready & Nikolai Roussanov & Colin Ward, 2013. "Commodity Trade and the Carry Trade: a Tale of Two Countries," NBER Working Papers 19371, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19371
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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