Currency Speculation

Over the past two decades, a growing body of research has documented profitable currency investment strategies. Beginning with the carry trade, the literature has expanded in multiple directions, uncovering diverse sources of excess return predictability linked to prices, trading volumes, and economic fundamentals. This article first reviews this burgeoning literature and provides a framework to organize its key strands for both academics and practitioners. We then turn to the often-overlooked issue of sample selection. Much of the existing work adopts an ad hoc approach to defining the currency universe. We show that strategy performance varies considerably across different currency subsamples. In particular, restricting the sample to countries with open capital accounts and liquid, floating currencies produces substantially weaker returns than when all currencies are included. Nonetheless, we find that combining strategies—regardless of the sample—yields improved and broadly comparable investment performance.