In this paper, we propose a new method to form currency carry trade portfolio for improving portfolio performance. The new method is a two-stage procedure and an ad-justment of the conventional sorting method. In the …rst stage, we …lter out currencies with low predictability of forward discounts. We then employ the conventional sorting method with the selected currencies. We apply the new method into real currency data and find that the new carry trade portfolio significantly outperforms the conventional portfolio. The outperformance of the new method over the conventional one is robust to various circumstances, and we also conduct additional analyses that supplement themain results.
Keywords: Currency carry trade. Sorting. Filtered sorting. forward discount.
JEL classification: F31, G11.
