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The carry-trade strategy has actually an average annualized benefit of 4.5 percent, with a conventional deviation of 5.2 percent, and a Sharpe ratio (the ratio of the mean excess go back to its conventional discrepancy) of 0.86. The momentum method is also highly lucrative, yielding a typical annualized payoff of 4.4 percent. The momentum payoffs have a basic deviation of 7.3 percent and a Sharpe ratio of 0.60.
To a crucial degree, the high Sharpe ratio of the carry-trade strategy reflects the large gains from diversifying across carry-trade strategies for specific currencies (see Burnside, Eichenbaum, Kleshchelski, and Rebelo (2006), henceforth BEKR (2006)). 4 In our sample, this diversity cuts the volatility of the payoffs by more than 50 percent. Considering that the average reward is not influenced, the Sharpe ratio of the portfolio doubles relative to the typical Sharpe ratio of specific bring trades. 5 Comparable gains to diversification obtain for currency momentum.
One way to show the presence of fat tails in the rewards generated by our techniques is to compute the worst in-sample annual benefits to currency techniques. In our sample, the worst yearly benefit is damaging 5.6 percent for the carry trade (in 2008) and unfavorable 10.9 percent for momentum (in 2012). It is essential to keep these losses in point of view: the worst annual payoff to the United States stock market over our sample was negative 40 percent (in 2008). By this metric, the threats associated with the fat tails of the currency methods are much less pronounced than those connected with the stock exchange.
Macroeconomists generally presume that asset markets are Walrasian in nature. This presumption is highly questionable. The forex market is in fact a decentralized, over the counter market in which market makers play a central role. In BER (2011 and 2009) 10, we check out the impact of 2 kinds of microstructure frictions that can possibly account for key abnormalities in exchange rate markets.
I can't keep in mind everything that happened from that point. The only thing I can tell is that losses were predominant for the next 2 years. I didn't have any trading plan jotted down but I thought I could still make earnings appear in my account. I was investing all my downtime reading about Forex trading, trading techniques, and technical analysis.