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Australian Dollar carry trades: Time varying probabilities and determinants

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  • Kim, Suk-Joong

Abstract

This paper investigates the nature and the determinants of the Australian dollar (AUD) carry trades using a Markov regime shifting model over the period 2 Jan 1999 to 31 Dec 2012. We find that the AUD could have been used, except for a number of short periods notably surrounding the outbreak of the GFC, as an investment currency in a carry trade regime. For daily horizon, prior to September 2008, carry trade probabilities are significantly lower in response to higher realized volatility of the USD/AUD, number of trades, the announcements of unexpected inflation and unemployment in Australia. They are significantly higher when order flows are positive (more buyer than seller initialed trades of AUD) and when RBA policy interest rate unexpectedly increase. At weekly horizon, realized skewness and net long futures position in the AUD contributed to the carry trade probabilities. On the other hand, post-September 2008 period shows a breakdown in the relationship between the carry trade probabilities and their determinants.

Suggested Citation

  • Kim, Suk-Joong, 2015. "Australian Dollar carry trades: Time varying probabilities and determinants," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 64-75.
    • Handle: RePEc:eee:finana:v:40:y:2015:i:c:p:64-75
    DOI: 10.1016/j.irfa.2015.03.015
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    Cited by:

    1. Copeland, Laurence & Lu, Wenna, 2016. "Dodging the steamroller: Fundamentals versus the carry trade," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 115-131.
    2. Sakemoto, Ryuta, 2019. "Currency carry trades and the conditional factor model," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 198-208.
    3. Shehadeh, Ali A. & Li, Youwei & Vigne, Samuel A. & Almaharmeh, Mohammad I. & Wang, Yizhi, 2021. "The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Ali Shehadeh & Peter Erdos & Youwei Li & Michael Moore, 2016. "US Dollar Carry Trades in the Era of "Cheap Money"," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(5), pages 374-404, October.
    5. Aydanur GACENER-ATIŞ & Deniz ERER, 2019. "Effects of Capital Flows on Carry Trade Activities: The Case of TurkeyAbstract: Carry trade is described as the capital flow coming into a country based on interest rate differential. A negative chang," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(42).

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    More about this item

    Keywords

    AUD carry trade; Regime shifting; News; Order flows; Speculative positions;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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