The carry trade robustness and exchange rate forecast
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Jorda and Taylor (2012) document persistent trading profits from marginally sophisticated carry trade strategy ('FEER' enhanced VECM model) that could have survived the once-in-life crisis in 2008. We extend Jorda and Taylor's work (2012) in three aspects. Firstly, we extend the observational periods up to December 2012 to see whether those simple carry trade strategies could have survived a relatively complete aftermath of the crisis. We show that when data include the relatively complete aftermath of the crisis , the mean returns from both VAR model and VECM model are significantly reduced i...
Jorda and Taylor (2012) document persistent trading profits from marginally sophisticated carry trade strategy ('FEER' enhanced VECM model) that could have survived the once-in-life crisis in 2008. We extend Jorda and Taylor's work (2012) in three aspects. Firstly, we extend the observational periods up to December 2012 to see whether those simple carry trade strategies could have survived a relatively complete aftermath of the crisis. We show that when data include the relatively complete aftermath of the crisis , the mean returns from both VAR model and VECM model are significantly reduced in magnitude for the periods ranging from 2000 to 2012. Secondly, we explicitly take into the account the bid-ask spread of spot exchange rate to examine whether the net trading profits are economically significant. Not surprisingly, we document a moderate decrease in mean trading profits after adjusting for the impact of bid-ask spread: the mean returns for some currency pairs from the VECM model could turn negative after subtracting the bid-ask spread. Lastly, we make some educated guess on what additional factors to include in our baseline model.
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