NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Commodity Trade and the Carry Trade: a Tale of Two Countries

Robert Ready, Nikolai Roussanov, Colin Ward

NBER Working Paper No. 19371
Issued in August 2013
NBER Program(s):   AP   EFG   IFM   ITI

Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. "Commodity currencies'' tend to have high interest rates while low interest rate currencies belong to exporters of finished goods. This pattern arises in a complete-markets model with trade specialization and limited shipping capacity, whereby commodity-producing countries are insulated from global productivity shocks, which are absorbed by the final goods producers. Empirically, a commodity-based strategy explains a substantial portion of the carry-trade risk premia, and all of their pro-cyclical predictability with commodity prices and shipping costs, as predicted by the model.

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Document Object Identifier (DOI): 10.3386/w19371

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