Carry trades and economic policy uncertainty: measuring the political dimension of the forward rate bias in emerging countries
Michael Araki (),
Marcelo Klotzle () and
Antonio Pinto ()
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Michael Araki: Pontifical Catholic University of Rio de Janeiro
Marcelo Klotzle: Pontifical Catholic University of Rio de Janeiro
Antonio Pinto: Pontifical Catholic University of Rio de Janeiro
Economics Bulletin, 2018, vol. 38, issue 3, 1476-1484
This paper investigates the political dimension underlying the phenomenon of carry trade excess returns in emerging economies. Excess carry trade returns are underpinned by an anomaly called the â€œforward rate biasâ€ . Several authors have argued that this anomaly can be partly explained by country-related risk factors. To investigate this claim, we utilize a new measure of political risk, the Economic Policy Uncertainty Index (EPU). We compare the magnitude of the local and global EPU indices, including country-level and international control variables, in seven emerging countries: Brazil, Chile, Colombia, India, Mexico, Russia and South Korea. Our findings indicate a significant negative relationship between carry trade excess returns and the country's EPU index.
Keywords: Political risk; Economic Policy Uncertainty; Emerging markets; Carry trades; Forward premium puzzle (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-18-00310
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