Foreign exchange investment rules and endogenous currency crashes

Louis Raffestin ()

Working Papers from HAL

Abstract: We present a model of the FX market with 3 agents: carry traders, momentum traders, and fundamentalists, where carry traders are subject to funding constraints. We show that the interactions between these agents provide a theoretical base for the empirical observation that exchange rates go up the stairs and down the elevator. Such microstructure eects also help explaining some important puzzles of the FX market such as the exchange rate disconnect from fundamentals and the seemingly abnormal prots to momentum and carry trading.

Keywords: Foreign exchange; currency crashes (search for similar items in EconPapers)
Date: 2016-02-22
New Economics Papers: this item is included in nep-mon
Note: View the original document on HAL open archive server: https://hal.science/hal-01277113
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