Emerging and Frontier Africa’s Currency Carry Trades : Any Value to Asset Allocation Decisions?

Carry trade, an investment strategy which takes advantage of the failure of uncovered interest parity condition (UIP), is well-documented in literature as profitable, though not in all markets. We evaluate the viability of emerging and frontier Africa's carry trades as an asset class and their significance for asset allocation decisions using Sharpe ratio contribution algorithm and a varying number of portfolio performance measures. We used monthly spot exchange rates and interbank interest rates covering the period January 2002 to December 2014. The results show that the emerging and frontier Africa's carry trades exhibit signs of improving the risk-adjusted performance of portfolios. We show that African carry trade's contribution to portfolio Sharpe ratio is relatively higher than the S&P 500 index and some risky assets over the period 2002-2014, and to a large extent, satisfies the criteria of an asset class. Thus, fund managers may consider diversifying their portfolio with African carry trades.