NDLI: Carry Trades and Exchange Rate Volatility: A TVAR Approach

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Carry Trades and Exchange Rate Volatility: A TVAR Approach

Content Provider	Scilit
Author	Anzuini, Alessio Brusa, Francesca
Copyright Year	2016
Description	Journal: SSRN Electronic Journal Recent empirical studies have established that deviations from the Uncovered Interest Parity (UIP) condition may be different across macroeconomic regimes. We extend this work to account for possible nonlinearities and endogeneity by estimating a Threshold Vector Autoregression (TVAR) model. Using carry trade proxies as in Brunnermeier et al. (2009) alongside a measure of realized exchange rate volatility, we endogenously identify two volatility regimes: low and high. Simulating an incentive to open a carry-trade position through an orthogonal shock to the interest rate differential, we find that carry trade performance varies across different regimes. This suggests that UIP deviations are more pronounced in the low volatility state and non-linearities play a role in explaining the forward bias.
Related Links	http://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1046/en_tema_1046.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2757086
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.2757086
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2016-01-21
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Mathematical Social Sciences Threshold Vector Autoregression Carry Trade
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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