Analysis of a Currency Harvest Strategy

Analysis of a Currency Harvest Strategy

Client/Allowance

Deutsche Bank AG

Period: 15.03. – 30.06.2007

This project analyzes the performance of the trading strategies of Deutsche Bank, which utilize the so called “forward premium puzzle”. The basis of these strategies are currency baskets in which low-yielding currencies will be sold short whereas high-yielding currencies will be bought. These so called Carry Trades are no riskless arbitrage opportunity but investors have to bear in general exchange rate and interest rate risks. We find that for both US and EU investors, the DB Currency Harvest strategies yield significant and positive excess returns. This result is in accordance with the academic literature on the forward rate puzzle. Unfortunately, the average excess return is not stable over time. We do not find that alternative strategies (e.g. using optimal portfolio weights) can outperform the relatively simple Carry Trade-strategies. We also do not find risk factors that could explain the profitability of these strategies either. Thus, the excess returns do not seem to be simply a compensation for higher risk.

Project members

Michael Schröder

Michael Schröder

Project Coordinator
Senior Researcher

To the profile
Qingwei Wang

Qingwei Wang

Research Associate

To the profile
Client/Allowance
Deutsche Bank AG, Frankfurt am Main, DE

Contact