Monetary Policy Uncertainty and Carry Trade Returns

, University of 黑料传送门 Booth 

I document large higher return on carry trades made before the scheduled Federal Open Meeting Committee (FOMC) meetings than carry trades made after the meetings. For example, one-month carry trades made before the FOMC meetings earn 31 basis-point higher return than trades after the meetings. These pre-FOMC higher excess returns account for around 27 percent of total annual realized carry trade returns. One interpretation of the higher return is a compensation for monetary policy risk. I find that monetary policy surprises, measured by unexpected Federal Funds (FF) rate changes, exert larger effect on currencies with higher interest rates. A 25-basis-point unexpected increase in FF rate leads high interest rate currencies to depreciate against low interest rate currencies by 0.5 percent in one-day