Carry Trade and Foreign Exchange Rate Puzzles

Willem Verschoor; R (Richard) Spronk; Remco Zwinkels

doi:10.1016/j.euroecorev.2013.01.007

Carry Trade and Foreign Exchange Rate Puzzles

Willem Verschoor, R (Richard) Spronk, Remco Zwinkels

Research output: Contribution to journal › Article › Academic › peer-review

48 Citations (Scopus)

Abstract

This article demonstrates that carry trade is part of the explanation of foreign exchange rate puzzles. We introduce carry traders in a heterogeneous agent model in addition to fundamentalists and chartists. Our model has the ability to produce the stylized facts observed in empirical exchange rates, such as heavy tails, excess volatility, and volatility clustering, as well as the negative relationship between market volatility and carry trade activity. We find that the interaction between carry traders and chartists provides an explanation for the forward premium puzzle. This effect is strengthened by chartists, who extrapolate the trend induced by carry trade.

Original language	English
Pages (from-to)	17-31
Number of pages	15
Journal	European Economic Review
Volume	60
DOIs	https://doi.org/10.1016/j.euroecorev.2013.01.007
Publication status	Published - 2013

Research programs

ESE - F&A

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10.1016/j.euroecorev.2013.01.007

http://hdl.handle.net/1765/41192

Cite this

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title = "Carry Trade and Foreign Exchange Rate Puzzles",

abstract = "This article demonstrates that carry trade is part of the explanation of foreign exchange rate puzzles. We introduce carry traders in a heterogeneous agent model in addition to fundamentalists and chartists. Our model has the ability to produce the stylized facts observed in empirical exchange rates, such as heavy tails, excess volatility, and volatility clustering, as well as the negative relationship between market volatility and carry trade activity. We find that the interaction between carry traders and chartists provides an explanation for the forward premium puzzle. This effect is strengthened by chartists, who extrapolate the trend induced by carry trade.",

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AB - This article demonstrates that carry trade is part of the explanation of foreign exchange rate puzzles. We introduce carry traders in a heterogeneous agent model in addition to fundamentalists and chartists. Our model has the ability to produce the stylized facts observed in empirical exchange rates, such as heavy tails, excess volatility, and volatility clustering, as well as the negative relationship between market volatility and carry trade activity. We find that the interaction between carry traders and chartists provides an explanation for the forward premium puzzle. This effect is strengthened by chartists, who extrapolate the trend induced by carry trade.

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DO - 10.1016/j.euroecorev.2013.01.007

M3 - Article

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VL - 60

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JO - European Economic Review

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Carry Trade and Foreign Exchange Rate Puzzles

Abstract

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