Commodity Trade and the Carry Trade: a Tale of Two Countries
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.
We benefited from comments by Andy Abel, Rui Albuquerque, Dave Backus, Gurdip Bakshi, John Campbell, Mike Chernov, Ric Colacito, Max Croce, Darrell Duffie, Xavier Gabaix, Jeremy Graveline, Robin Greenwood, Tarek Hassan, Burton Hollifield, Urban Jermann, Karen Lewis, Debbie Lucas, Don Keim, Brent Neiman, Jose Scheinkman, Ivan Shaliastovich, Rob Stambaugh, Andreas Stathopoulos, Sheridan Titman, Adrien Verdelhan, Jessica Wachter, Amir Yaron, Stan Zin, and audiences at the CEPR ESSFM Gerzensee, Minnesota Asset Pricing conference, Oxford-MAN Currency Trading conference, NBER SI, NBIM, SECOR, Texas Finance Festival, SED, WFA, and Wharton. Roussanov acknowledges financial support from the Iwanowski Family Research Fellowship and Wharton Global Research Initiative. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Some of this work was presented at Norges Bank Investment Management (NBIM); a small honorarium was paid by NBIM.
ROBERT READY & NIKOLAI ROUSSANOV & COLIN WARD, 2017. "Commodity Trade and the Carry Trade: A Tale of Two Countries," The Journal of Finance, vol 72(6), pages 2629-2684. citation courtesy of