Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method

Qian Zhang, Kuo-Jui Wu and Ming-Lang Tseng
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Qian Zhang: SHU-UTS SILC Business School, Shanghai University, Shanghai 201899, China
Kuo-Jui Wu: School of Business, Dalian University of Technology, Dalian 124221, China
Ming-Lang Tseng: Institute of Innovation and Circular Economy, Asia University, Taichung 41354, Taiwan

Sustainability, 2019, vol. 11, issue 12, 1-26

Abstract: This paper constructs a heterogeneous agent model for the foreign exchange market that is based on the law of supply and demand and includes carry trade, central bank intervention, and macroeconomic fundamentals. With the artificial intelligence method of the unscented Kalman filter, this paper investigates carry traders’ expectation formation and risk aversion and the impact of their activities on the movement of the Chinese yuan exchange rate and on the efficiency of central bank intervention. The findings demonstrate that carry traders’ activities are partially responsible for fluctuations in the Chinese yuan exchange rate; carry traders behave with obvious risk aversion; their activities tend to weaken the ability of the central bank to intervene in China’s foreign exchange market; and the volatility of the Chinese yuan exchange rate and the weight of carry traders are negatively related. Based on these empirical results, specific suggestions for exploring sustainable financial resources are provided.

Keywords: Chinese yuan exchange rate; carry trade; unscented Kalman filter (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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