Carry trades, agent heterogeneity and the exchange rate

Xiao-Ping Li, Chun-Yang Zhou and Bin Tong

International Review of Economics & Finance, 2019, vol. 64, issue C, 343-358

Abstract: In this paper, we investigate the equilibrium properties of the exchange rate within the framework of a dynamic heterogeneous agent model. Carry traders, fundamentalists and chartists are incorporated into our heterogeneous agent model. We find that carry trading plays an important role in exchange rate markets and can cause an exchange rate to deviate from its fundamental equilibrium. In addition, we use the unscented Kalman filter to estimate the heterogeneous agent model. The results show that carry traders’ activities are significantly affected by the interest rate differential between two currencies.

Keywords: Carry trade; Heterogeneous agent; Fundamental equilibria; Unscented kalman filter (UKF); Interest rate differential (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:64:y:2019:i:c:p:343-358

DOI: 10.1016/j.iref.2019.07.001

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