Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation

摘要

In this paper, we derive the dynamics and assess the economic value of currency speculation byformalizing the concept of a trader inaction range. We show that exchange rate returns comprisea time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense.The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standardUIP tests. Consistent with its popularity among market professionals, the carry-trade strategy canbe rationalized as it systematically collects risk-premia and generates economic value when appliedin multi-currency portfolios.