Contact Us

For Marketing, Sales and Subscriptions Inquiries
Rockefeller Center, 45 Rockefeller Plaza
20th Flr Unit #5, New York, NY 10111
United States

Conference List

The Economics and Finance Letters

February 2016, Volume 3, 2, pp 21-29

Forecasting-Based Carry Trade Using Pegged Currency: A Case of Omani Rial

Musaed S. AlAli

Musaed S. AlAli 1

  1. Department of Insurance and Banking, College of Business Studies, PAAET Safat, Kuwait 1

on Google Scholar
on PubMed

Pages: 21-29

DOI: 10.18488/journal.29/2016.3.2/

Share :


This paper examines the profitability of using an emerging country, currency that is pegged to the U.S. dollar in carry trade against floating currencies. It also examines the effect of embedding forecasting techniques in its profitability and risk-adjusted returns. While carry trade is performed largely with currencies that adapt a floating exchange rate system, conducting such a strategy using pegged currency has proven to be very rewarding, especially when the strategy is enhanced with forecasting methods. Carry trade is a speculative strategy where carry traders take advantage of interest rate differential between two currencies. It is conducted by borrowing a low interest rate currency and investing in a high interest rate currency. According to uncovered interest parity (UIP), carry trade should not yield any profit. If investors are both rational and risk-neutral, then exchange rate changes will eliminate any gains arising from the differential in interest rate. But literature has shown that UIP does not hold. This failure has led to unprecedented returns for that strategy matching the returns of the S&P 500 and outperforming it in terms of Sharpe ratio.

Contribution/ Originality
This study contributes to the existing literature on carry trade by examining the feasibility of using pegged currencies in such strategy. This study is one of the few studies which has investigated the effect of embedding forecasting methods in the selection process and its effect on return, risk and risk-adjusted returns.


Carry trade, Random walk, Uncovered interest parity (UIP), Omani rial (OMR), Monetary Model, Sharpe Ratio.



  1. AlAli, M.S. and Y.A. AlKulaib, 2015. Carry trade profitability using pegged currency: A case of the qatari riyal. International Journal of Economics and Finance, 7(10): 215-221.
  2. Baillie, R. and S. Chang, 2011. Carry trades, momentum trading and the forward premium anomaly. Journal of Financial Markets, 14(3): 441-464.
  3. Bhatti, R., 2012. On return and risk in carry trades: A case of the pak rupee. International Journal of Economic and Finance Studies, 4(2): 201-214.
  4. Brunnermeier, M., S. Nagel and L. Pedersen, 2008. Carry trades and currency crashes. National Bureau of Economic Research. November.
  5. Brunnermeier, M. and L. Pedersen, 2009. Market liquidity and funding liquidity. Review of Financial Studies, 22(6): 2201-2238.
  6. Burnside, C., 2007. The forward premium is still a puzzle. NBER Working Papers No. 13129.
  7. Burnside, C., M. Eichenbaum, I. Kleshchelski and S. Rebelo, 2006. The returns to currency speculation (NBER Working Paper No. 12489). Cambridge, MA: National Bureau of Economic Research.
  8. Burnside, C., M. Eichenbaum, I. Kleshchelski and S. Rebelo, 2007. The returns to currency speculation in emerging markets (NBER Working Paper No. 12916). Cambridge, MA: National Bureau of Economic Research.
  9. Cheung, Y., M. Chinn and A. Garcia, 2005. Empirical exchange rate models of the nineties: Are any fit to survive? Journal of International Money and Finance, 24(7): 1150-1175.
  10. Chinn, M. and G. Meredith, 2004. Monetary policy and long horizon uncovered interest oarity. IMF Staff Papers, No. 51.
  11. Chow, K. and K.L.Y. Tan, 2007. The use of profits as opposed to conventional forecast evaluation criteria to determine the quality of economic forecasts. Singapore: Nanyang Business School, Nanyang Technological University.
  12. Darvas, Z., 2009. Leveraged carry trade portfolios. Journal of Banking and Finance, 33(5): 944-957.
  13. Della, C.P., L. Sarno and I. Tsiakas, 2009. An economic evaluation of empirical exchange rate models. Review of Financial Studies, 22(9): 3491-3530.
  14. Duni, C. and J. Miao, 2007. Trading foreign exchange portfolios with volatility filters: The carry trade model revisited. Applied Financial Economics, 17(3): 249-255.
  15. Engel, C. and J. Hamilton, 1990. Long swings in the dollar: Are they in the data and do markets know it? American Economic Review, 80: 689-713.
  16. Engel, C., N. Mark and K. West, 2007. Exchange rate models are not as bad as you think. NBER Working Paper Series, No. 13318.
  17. Engle, C., 1996. The forward discount anomaly and the risk premium: A survey of recent evidence. Journal of Empirical Finance, 3(2): 123-192.
  18. Fair, R., 2008. Estimating exchange rate equations using estimated expectations. Yale University ICF Working Paper, No. 07-18.
  19. Flood, R. and A. Rose, 2002. Uncovered interest parity in crisis. IMF Staff Papers, No. 49.
  20. Frankel, J.A. and A.K. Rose, 1995. A survey of empirical research on nominal exchange rates. No. C95-051. University of California at Berkeley.
  21. Galati, G., A. Heath and P. McGuire, 2007. Evidence of carry trade activity. BIS Quarterly Review: 27-41.
  22. Gyntelberg, J. and E. Remolona, 2007. Risk in carry trade: A look at target currencies in asia and the pacific. BIS Quarterly Review, 4: 73-82.
  23. Hattori, M. and H. Shin, 2007. The broad Yen Carry trade. Institute for Monetary and Economic Studies Paper. No. 07-E-19. Bank of Japan.
  24. Hattori, M. and H. Shin, 2009. Yen carry trade and the subprime crisis. IMF Staff Papers, No. 56(56): 384–409.
  25. Hoffmann, A., 2012. Determinants of carry trades in central and Eastern Europe. Applied Financial Economics, 22(18): 1479-1490.
  26. Jorda, O. and A. Taylor, 2009. The carry trade and fundamentals: Nothing to fear but FEER itself (NBER Working Paper No. 15518). Cambridge, MA: National Bureau of Economic Research.
  27. Jurek, J., 2014. Crash-neutral currency carry trades. Journal of Financial Economics, 113(3): 325-347.
  28. Jylhä, P. and M. Suominen, 2011. Speculative capital and currency carry trades. Journal of Financial Economics, 99(1): 60-75.
  29. Leitch, G. and J. Tanner, 1991. Economic forecast evaluation: Profit versus the conventional error measures. American Economic Review, 81: 580-590.
  30. Li, M., 2011. An evaluation of exchange rate models by carry trade. Journal of Economics and International Finance, 3(2): 72-87.
  31. Liu, M., D. Margaritis and A. Tourani-Rad, 2012. Risk appetite, carry trade and exchange rates. Global Finance Journal, 23(1): 48-63.
  32. Meese, R. and K. Rogoff, 1983. Empirical exchange rates models of the seventies: Do they fit out of sample? Journal of International Economics, 14(1): 3-24.
  33. Menkhoff, L., L. Sarno, M. Schmeling and A. Schrimpf, 2012. Carry trades and global foreign exchange volatility. Journal of Finance, 67(2): 681-718.
  34. Mitchell, M., L. Pedersen and T. Pulvino, 2007. Slow moving capital. American Economic Review, 97: 215-220.
  35. Moosa, I., 2004. What is wrong with market-based forecasting of exchange rates? International Journal of Business and Economics, 3(2): 107-121.
  36. Moosa, I., 2008. Risk and return in carry trade. Journal of Financial Transformation, 22(3): 8-13.
  37. Moosa, I., 2010. The profitability of carry trade. Economia Internazionale, 63: 261-380.
  38. Moosa, I., 2013. Why is it so difficult to outperform the random walk in exchange rate forecasting? Journal of Applied Economics, 45(23): 3340-3346.
  39. Moosa, I. and K. Burns, 2012. Can exchange rate models outperform the random walk? Magnitude, direction and profitability as criteria. Journal of International Economics (Economia Internazionale), 65(3): 473-490.
  40. Moosa, I. and P. Halteh, 2012. The profitability of carry trade relative to a forecasting-based strategy. Journal of International Economics, 65(4): 605-621.
  41. Neely, C. and P. Weller, 2013. Lessons from the evolution of foreign exchange trading strategies. Journal of Banking and Finance, 37(10): 3783-3798.
  42. Schmidbauer, H., A. Rösch, T. Sezer and V. Tunalıoglu, 2010. Currency carry trading with MGARCH based carry-to-risk portfolio optimization. Proceedings of the 30th International Symposium on Forecasting ISF2010, San Diego, June 20-23.
  43. Szilagyi, P. and J. Batten, 2006. Arbitrage, covered interest parity and long-term dependence between the US dollar and the Yan.  IIIS Discussion Paper, No. 128.
  44. The Economist, 2007. Economics focus: Carry on speculating.
  45. Tosborvorn, T., 2010. Exploring the Yen Carry trade: Investor’s choice of target currencies. Stanford University. Available from
  46. West, D., H. Edison and D. Cho, 1993. A utility-based comparison of some models of exchange rate volatility. Journal of International Economics, 35(1-2): 23-45.


Google Scholor ideas Microsoft Academic Search bing Google Scholor


This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.


I would like to express my gratitude to Prof. Imad Moosa from RMIT University for his gaudiness and unconditional support. I would also like to thank the anonymous referees for their thoughtful comments.

Related Article

( 1 ) Forecasting-Based Carry Trade Using Pegged Currency: A Case of Omani Rial
( 3 ) Does the Mena Countries May Converge in GDP to Southern European One? The Effects of International Trade
( 4 ) The Potential of Rural–Urban Linkages for Sustainable Development and Trade
( 5 ) An Empirical Test on Effect of Intra-Product Trade on Regional Income Distribution: The Case of Liaoning, China
( 6 ) Development of the National Economies and the Foreign Trade Relations between Ukraine and Bulgaria (In the Period 2005-2014)
( 8 ) The Effects of Exchange Rate Variability on Trade Flows in Nigeria: A Cointegration Analysis
( 9 ) Trade Policy and Democracy for Development in Central African Countries
( 10 ) Problems of Bilateral Trade Deficit between Bangladesh and India: A 2SLS Regression Analysis
( 11 ) Rethinking Port Role as Transport Corridor under Symbiosis Theory-Case Study of China-Europe Trade Transportation
( 12 ) Trade Union Performance and Industrial Relations Climate in the Nigerian Petroleum Sector
( 13 ) Nexus among Foreign Exchange Reserve, Remittance and Trade Openness: An Empirical Investigation in the Case of Bangladeshi Economy
( 14 ) The Impact of Trade on Poverty in Sub-Saharan Africa: Do Sources Matter?
( 15 ) Impacts of the U.S.-China Trade Conflicts News on U.S. and Chinese Stock Returns
( 16 ) Econometric Analysis of Dutch Disease Implication of China-Africa Trade
( 17 ) Study on Environment and Energy Using Belonging Materials
( 18 ) The Impact of Human Capital on Economic Growth: Evidence from Tunisia Using Star and Stecm Models
( 19 ) Influence Internship Learning Effect in Business Service Sector: Using Internship Self-Efficacy as the Mediator Variable
( 20 ) Estimating Value at Risk for Sukuk Market Using Generalized Auto Regressive Conditional Heteroskedasticity Models
( 21 ) Confirming the Mediation Effect of A Structural Model By Using Bootstrap Approach: A Case Study of Malaysian 8th Grade Students’ Mathematics Achievement
( 22 ) The Lead-Lag Relationships between Construction Investment and GDP: Granger Causality Tests and Impulse Responses Using Japanese Data
( 24 ) Testing the PPP Using Unit Root Tests with Structural Breaks: Evidence from Politically Unstable Arab Countries
( 25 ) On the Prediction of the Inflation Crises of South Africa Using Markov-Switching Bayesian Vector Autoregressive and Logistic Regression Models
( 26 ) Participatory Processes in Planning for Self-Help Housing Provision in South Africa: Policies and Challenges
( 27 ) Leading Indicators and Financial Crisis: A Multi-Sectoral Approach Using Signal Extraction
( 28 ) The Importance of Public Administration Towards Achieving Good Governance for Positive National Development by Using SmartPLS 3
( 29 ) Analyzing the Financial Soundness of Kuwaiti Banks Using CAMELS Framework
( 30 ) Consumers’ Behavioural Intention to Adopt Mobile Banking in Rural Sub-Saharan Africa Using an Extension of Technology Acceptance Model: Lessons from Zimbabwe
( 31 ) Exploring the Dimensions Using Exploratory Factor Analysis of Disruptive Factors and Inventory Control
( 32 ) Modeling and Estimation of Cumulative Abnormal Return using VECM
( 35 ) The Colonialists & Indigenous Exchange Currency: Tracing the Genesis of Socioeconomic Woes in Postcolonial Nigeria
( 36 ) Kashmir Peasant Economy under Dogra’s: A Case Study of Agrarian Produce and Livestock 1885-1925 A.D
( 37 ) Promoting Entrepreneurship through Open and Distance Education in Zimbabwe. A Case Study of the Zimbabwe Open University Students at Masvingo Regional Campus
( 38 ) Taylor Rule in The Context of Inflation Targeting: The Case of Tunisia
( 39 ) Geographical Starting Points the Analysis of Current Rural Problems in Montenegro: Case Study of Rural Local Community Kralje
( 40 ) Reminiscing Stock Splits Announcement: A Malaysian Case
( 41 ) Testing the Random Walk: The Case of Hong Kong Stock Exchange
( 42 ) Foreign Direct Investment (FDI) and Employment: A Case of Province of Punjab, Pakistan
( 43 ) The Association Between Corporate Risk Disclosure and Firm Performance in Emerging Country – The Case of Egypt
( 44 ) Local Governance and Service Delivery in Zimbabwean Local Authorities: The Case of Harare and Masvingo Urban Municipalities
( 45 ) Promoting Local Acceptability of International Oil Companies (IOCS) Through Corporate Social Responsibility (CSR): The Case of Tullow Oil in Ghana
( 46 ) Challenges and Survival Strategies for Women in Small Scale Catering Business: A Case Study of Siyaso Magaba, Mbare
( 47 ) Attributes Influencing Strategic Alignment in the Service Sector: An Indonesian Banking Sector Case Study
( 48 ) Micro-Credits and Poverty Reduction in Dar-Es-Salaam, Tanzania: A Case Study of Dar-Es-Salaam Commercial Bank
( 50 ) Effects of Advertising on Consumer Behavior in Low Density Houses: The Case of Marlborough, Zimbabwe
( 51 ) An Assessment of the Impact of Information Communication Technology (ICT) On the Administration of Public Records: A Case Study of the Bolgatanga Municipal Assembly in the Upper East Region of Ghana-West Africa
( 52 ) Investigating the Demand of Small Hotel and Restaurant Businesses for Bank Financing: The Case of Turkey
( 53 ) A Review on EU Transportation Projects within the Case of Turkey for European Union Regional Development Policy
( 56 ) A Theoretical Analysis Upon the Environmental Health and Justice Issue: A Case Study for a Comparison Between G20s Unitary and Federal Members
( 57 ) A Factor Analysis Approach Towards a Study of the Factors Affecting Students’ Choice of Higher Education Institution: A Case Study of a Private Institution (Twintech International University College of Technology)
( 58 ) Effects of Environmental Satisfaction on Family Displacement Case Study: Gohar Dasht Region, Karaj City
( 59 ) Rice Farmer and Capital Formation: A Case Study of Rice Farmer's Credit Cooperative in Itoikin, Ikosi-Ejirin LCDA, Lagos State
( 60 ) Investment Climate Rating Evaluation: The Case of Ukrainian Economy
( 61 ) Interfaces Between Road Infrastructure and Poverty in Africa: The Case of Malawi, 1994-2013
( 62 ) National Security and Democratization in Nigeria: The Case of Insurgence
( 63 ) Internationalization of State Multilatinas: A Multi-Case Study in The Oil Sector
( 64 ) A Case Study of Local Government Implementation of the Ward Based Local Economic Development (LED) Program
( 65 ) An Evaluation of Effectiveness of Oversight Committees: A Case of City of Johannesburg, Section 79 Committees
( 66 ) An Investigation into the Causes of Failures in Railway Infrastructure at Transnet Freight Rail - A Case of the Steel and Cement Business Unit
( 67 ) Does Agricultural Sector Contribute to the Economic Growth in Case of Republic of Benin?
( 68 ) Investigate Airport Service Quality- A Case Study of Airports in Shanghai
( 69 ) The Impact of Organisational Culture on Public Sector Performance: A Case Study of Local Authorities in Zimbabwe
( 70 ) An Empirical Assessment of the Impact of Access to Credit on Farm Output: A Case Study of Sefwi-Wiawso Municipality Ghana
( 71 ) Determinants of Banks Profitability & Liquidity and the Role of BASEL III in Islamic & Conventional Banking Sector of Pakistan: A Case Study of NBP
( 72 ) Investigating the Impact of Business Alignment on Job Gratification in an Organization: The Case of a University in Egypt
( 73 ) Migration as a Livelihood Strategy: The Case of Internal Migration in Ghana
( 74 ) The Effect of Selected Factors on Tax Revenue Mobilization in Ethiopia: The Case of Amhara Region
( 75 ) Deterrents to the Success of Micro and Small Enterprises in Ethiopia: The Case of Amhara Region MSEs
( 76 ) The Mediating Effect of Financial Self-Efficacy on the Financial Literacy-Behavior Relationship: A Case of Generation Y Professionals
( 78 ) Re-Engineering Nigerian Economy through Human Capital Development: A Case of Manufacturing Firms In Southern Part of Nigeria
( 79 ) Analysis of Traffic Accident Occurrence at Hazardous Road Locations: A Case Study in Tunisia
( 80 ) Inflation, Oil Revenue, and Monetary Policy Mix in an Oil-Dependent Economy: Empirical Insights from the Case of Nigeria
( 81 ) Factors Influencing on Human Resources Development in SMEs Service Enterprises in Industry 4.0: The Case of Thai Nguyen Province, Vietnam
( 82 ) Fraud Auditing Law Implications in the Case of Jiwasraya Insurance in Indonesia
( 83 ) The Effects of Macroeconomic Variables on Bank Default: A Case Study in Brazil
( 84 ) The Problem of Distribution of Food Products and their Influence on the Decision of Purchasing in the Consumer a Case Study of Milk Products in the South, Algeria
( 85 ) The Promise and Reality of Public Sector Reform – A Case Study of the Implementation of Trinidad and Tobagos Health Sector Reform
( 86 ) Factors Influencing Profitability of Commercial Banks in Tanzania: A Case Study of CRDB Bank Plc
( 88 ) An Analyses of Exchange Rate Volatility: A Case of SANE Countries
( 89 ) The Influence of Organizational Culture, Communication and Work Satisfaction on Organizational Commitments: A Case Study of Lecturers at Yayasan Pendidikan Borobudur
( 91 ) External Factors Influencing on Industrial Building System (Ibs) in Malaysia
( 93 ) The Sustainable Livelihoods Index: A Tool To Assess the Ability and Preparedness of the Rural Poor in Receiving Entrepreneurial Project
( 94 ) Beyond Marxist Economism and Entrepreneurial Essentialism: Post-Colonial Politics of Empire in Chinua Achebe’s And Linus Asong’s Writings