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An Investigation into the Viability of the Carry Trade as an Investment Strategy, 2011-2015

Catchpole, Shane (2016) An Investigation into the Viability of the Carry Trade as an Investment Strategy, 2011-2015. Masters thesis, Dublin, National College of Ireland.

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Abstract

The carry trade is an investment strategy which an investor borrows money at a low interest rate, then proceeds to invest that money into a country with a higher rate. One of the underlying theories that states carry trading should not be profitable is Uncovered Interest Parity. This assumption states that an investor looking to profit from the interest rate differential between two countries should not benefit because of the movements in the foreign exchange market. This theory has been historically disproved academically which has led to investors making excess returns. Furthermore, an inability to explain excess returns largely based on Fama’s (1984) hypothesis of risk premium has left the finance industry scratching their head.

Recent literature suggests that for a number of currencies that a reversal in UIP has made carry trades unprofitable. This has been documented for a brief period after the financial crisis (until Sept 11’). This thesis investigates 9 carry trades over the period of period of 2001-2015. Through analysis on the characteristics of returns and their distributions it is evident there is large risk involved in the strategy. By splitting the data into relevant rime periods to fully assess its performance during the business cycles over the timeframe it gives conclusive evidence of performance. Using Sharpe ratios to measure risk adjusted compensation and a carry trade model for profitability it enables detailed analysis of when the trade is profitable. Alongside this assessment, the S&P500, FTSE 250 and Nikkei 225 are used to comparably evaluate the carry trades position in the investment landscape. It is discovered that the carry trades attraction post financial crisis has largely diminished as an investment strategy, but is concluded to be still profitable on the whole.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HG Finance > Credit. Debt. Loans.
H Social Sciences > HG Finance > Investment > Investment Strategy
Divisions: School of Business > Master of Science in Finance
Depositing User: CAOIMHE NI MHAICIN
Date Deposited: 04 Nov 2016 11:06
Last Modified: 04 Nov 2016 11:06
URI: http://trap.ncirl.ie/id/eprint/2333

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