Foreign exchange investmentrules and endogenous currency crashes?

Louis Raffestin ()
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Louis Raffestin: Larefi, Université de Bordeaux

No 1601, Larefi Working Papers from Larefi, Université Bordeaux 4

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 interac-tions between these agents provide a theoretical base for the empirical observation that exchange rates go up the stairs and down the elevator. Such microstructure e?ects also help explaining some important puzzles of the FX market such as the exchange rate disconnect from fundamentals and the seemingly abnormal pro?ts to momentum and carry trading.

Pages: 41 pages
Date: 2016-01
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