Carry trade and foreign exchange rate puzzles

Richard Spronk, Willem Verschoor and Remco Zwinkels ()

European Economic Review, 2013, vol. 60, issue C, 17-31

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.

Keywords: Exchange rates; Carry trades; Forward premium puzzle; Heterogeneous agent model; Market volatility (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:60:y:2013:i:c:p:17-31

DOI: 10.1016/j.euroecorev.2013.01.007

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