Victoria Galsband, Thomas Nitschka, 10 March 2013

Violations of the uncovered interest-rate parity – a zero-profit equilibrium condition in foreign-exchange markets – seems to consistently give rise to profitable currency trading. This column highlights the risky nature of this phenomenon, arguing that it is the exposure to stock-market cash flows that is the key secret to making money from global currency portfolio investments. High returns from currency trading compensate investors for taking on severe stock-market risks.

CEPR Policy Research