Show simple item record Burnside, A. Craig en_US Eichenbaum, Martin en_US Kleshchelski, Isaac en_US Rebelo, Sergio T. en_US 2010-03-09T15:42:22Z 2010-03-09T15:42:22Z 2006 en_US
dc.description.abstract Currencies that are at a forward premium tend to depreciate. This `forward-premium puzzle` represents an egregious deviation from uncovered interest parity. We document the properties of returns to currency speculation strategies that exploit this anomaly. We show that these strategies yield high Sharpe ratios which are not a compensation for risk. In practice bid-ask spreads are an increasing function of order size. In addition, there is price pressure, i.e. exchange rates are an increasing function of net order flow. Together these frictions greatly reduce the profitability of currency speculation strategies. In fact, the marginal Sharpe ratio associated with currency speculation can be zero even though the average Sharpe ratio is positive. en_US
dc.format.extent 444699 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US
dc.publisher SSRN eLibrary en_US
dc.subject currency speculation en_US
dc.subject exchange rates en_US
dc.subject forward premium puzzle en_US
dc.subject sharpe ratios en_US
dc.title The Returns to Currency Speculation en_US
dc.type Journal Article en_US
dc.department Economics

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