The role of the enhanced carry to risk on currency policy: the Mexican Peso

Fernández-Herraiz, Carlos; Prado-Domínguez, Antonio Javier; Pateiro-Rodríguez, Carlos; García-Iglesias, Jesús Manuel

doi:10.1080/00036846.2018.1529395

Cited by 2 publications

(1 citation statement)

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“…Studies on carry trade are key to understanding currency excess returns, especially for emerging currencies [61,62]. Furthermore, it is argued that the carry-to-risk ratio considering credit default swaps could help the central bank understand the attractiveness of the carry trade strategy and operate effective policies to restrict the activities of carry traders [63]. With an endogenous regime switching model, it is found that carry trades are profitable in a regime with low exchange rate volatility and unprofitable during economic downturns [64].…”

Section: Heterogeneous Agentsmentioning

confidence: 99%

Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method

Zhang

Tseng

2019

Sustainability

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This paper constructs a heterogeneous agent model for the foreign exchange market that is based on the law of supply and demand and includes carry trade, central bank intervention, and macroeconomic fundamentals. With the artificial intelligence method of the unscented Kalman filter, this paper investigates carry traders’ expectation formation and risk aversion and the impact of their activities on the movement of the Chinese yuan exchange rate and on the efficiency of central bank intervention. The findings demonstrate that carry traders’ activities are partially responsible for fluctuations in the Chinese yuan exchange rate; carry traders behave with obvious risk aversion; their activities tend to weaken the ability of the central bank to intervene in China’s foreign exchange market; and the volatility of the Chinese yuan exchange rate and the weight of carry traders are negatively related. Based on these empirical results, specific suggestions for exploring sustainable financial resources are provided.

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