Currency carry under falling stars

• Grant number: 24/01046-9
• Support Opportunities: Scholarships in Brazil - Doctorate (Direct)
• Start date: June 01, 2024
• End date: December 31, 2027
• Field of knowledge: Applied Social Sciences - Economics - International Economy
• Principal Investigator: Marco Antonio Cesar Bonomo
• Grantee: Mohammed Mehdi Kaebi
• Host Institution: Instituto de Ensino e Pesquisa (Insper). São Paulo , SP, Brazil
• Associated scholarship(s): 24/16089-5 - Term-Structure of Equity Risk and the Cross-Section of Currency Returns, BE.EP.DD

Abstract

This research project proposes a novel approach to the Carry Trade, anchored in the long-run equilibrium nominal interest rate of global economies, diverging from the conventional method reliant on forward premiums. Preliminary findings indicate that this alternative Carry Trade strategy not only outperforms the traditional model, making the Carry Trade anomaly even stronger, but is also able to explain the cross-section of currency excess returns for multiple countries in a more comprehensive way. This approach embeds the Carry Trade within a macroeconomic framework, highlighting the significance of fundamental economic variables in shaping currency investment decisions. (AU)