Arbeitspapier
Exchange Rates, Interest Rates and the Global Carry Trade
We empirically examine how the global carry trade affects the dynamics of spot exchange rates and interest rates across 13 countries from 2000, through the world financial crisis, until the end of 2011. Our model identifies the weekly carry trade position in each currency by matching data on forex trading flows with the predictions of a dynamic portfolio allocation problem that exploits the predictability in excess currency returns (deviations from uncovered interest parity). Using these carry positions produce two surprising results: First, in nine countries carry trades are an economically significant driver of interest rate differentials (vs. U.S. rates). Second, the carry trade only affects the dynamics of spot exchange rates insofar as it is contributes to total forex order flow; (i.e., flows generated by the carry trade and all other trading motives). These findings contradict the conventional view that sudden large movements in exchange rates are attributable to the carry trade. They suggest, instead, that the effects of the global carry trade are primarily concentrated in bond markets.
- ISBN
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978-82-7553-994-4
- Language
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Englisch
- Bibliographic citation
-
Series: Working Paper ; No. 14/2017
- Classification
-
Wirtschaft
- Subject
-
exchange rate dynamics
microstructure
order flow
- Event
-
Geistige Schöpfung
- (who)
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Evans, Martin D. D.
Rime, Dagfinn
- Event
-
Veröffentlichung
- (who)
-
Norges Bank
- (where)
-
Oslo
- (when)
-
2017
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Evans, Martin D. D.
- Rime, Dagfinn
- Norges Bank
Time of origin
- 2017
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Commodity Prices, Interest Rates and the Dollar
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When Does an Interest Rate Path "Look Good"? Criteria for an Appropriate Future Interest Rate Path
Documentation of the Method Used by Norges Bank for Estimating Implied Forward Interest Rates
Interbank Overnight Interest Rates - Gains from Systemic Importance
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