Empirical Analysis and Optimization of Foreign Exchange Carry Trade Strategy: Evaluating Performance in Emerging Markets

Abstract

In the contemporary global financial landscape, an inquiry arises regarding the applicability of the foreign exchange carry trade—a traditional hedged strategy prevalent in the Western world—within an Eastern market. Additionally, considering that this strategy stems from the Efficient Market Hypothesis, its suitability in an Eastern context may indirectly shed light on the efficiency of the currency market in question. This study constructs a portfolio utilizing the foreign exchange carry trade and conducts an empirical analysis. Moreover, to enhance the strategy's performance, two distinct refinements are proposed, culminating in a more robust investment recommendation.