Predicting the bear currency carry trade market: does it add economic value?

摘要

The failure of the uncovered interest rate parity implies that currency carry trading de- livers positive predictable excess returns on average. However, currency carry trading exhibits long periods of steady gains and sudden periods of high volatility with reversals in previous gains. We analyse the predictability of bear and bull currency carry trade markets using financial variables as leading indicators. We find that the US TED spread, the three-month CRB Industrial return, the currency carry trade factor and the FX volatility have out-of-sample predictive power for the bear currency carry trade market probability, which also provides valuable portfolio signals to investors.