The profitability of carry trades

Abstract

The uncovered interest parity (UIP) condition suggests that carry trades whereby investors borrow in the low interest rate currency and invest in the high interest rate currency should not result in excess profits over the long run. In this paper, we test the significance of the conventional empirical failure of UIP condition. Using the four bilateral pound parities we fail to detect significant excess carry trade profits for the yen, euro and swiss franc–pound parities. The only parity for which the carry trade consistently makes excess profits is the dollar–pound parity. This result is somewhat surprising as this is the currency pair with the lowest interest rate differential.

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Correspondence to Keith Pilbeam.

Additional information

We are extremely grateful for the anonymous referee’s comments on this paper.

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Olmo, J., Pilbeam, K. The profitability of carry trades. Ann Finance 5, 231–241 (2009). https://doi.org/10.1007/s10436-008-0098-2

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Keywords

  • Carry-trade
  • Efficient market hypothesis
  • Profitability tests
  • Uncovered interest parity

JEL Classification

  • F30
  • F31
  • F37