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Speculative capital and currency carry trades

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  • Jylhä, Petri
  • Suominen, Matti
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    Abstract

    In this paper, we study a two-country general equilibrium model with partially segmented financial markets, where hedge funds emerge endogenously. Empirically, we show that the hedge fund investment strategy predicted by our model, which we call the "risk-adjusted carry trade" strategy, explains more than 16% of the overall hedge fund index returns and more than 33% of the fixed income arbitrage sub-index returns. The flow of new money to hedge funds affects market interest rates, exchange rates, and both the hedge funds' contemporaneous and expected future returns as predicted by the model.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 99 (2011)
    Issue (Month): 1 (January)
    Pages: 60-75

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    Handle: RePEc:eee:jfinec:v:99:y:2011:i:1:p:60-75

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Hedge funds Currency speculation Carry trades;

    References

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    Cited by:
    1. Georgios, Katechos, 2011. "On the relationship between exchange rates and equity returns: A new approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 550-559, October.
    2. Kondor, Péter & Vayanos, Dimitri, 2014. "Liquidity Risk and the Dynamics of Arbitrage Capital," CEPR Discussion Papers 9885, C.E.P.R. Discussion Papers.
    3. Nucera, Federico & Valente, Giorgio, 2013. "Carry trades and the performance of currency hedge funds," Journal of International Money and Finance, Elsevier, Elsevier, vol. 33(C), pages 407-425.
    4. Bakshi, Gurdip & Panayotov, George, 2013. "Predictability of currency carry trades and asset pricing implications," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 139-163.
    5. Potì, Valerio & Siddique, Akhtar, 2013. "What drives currency predictability?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 36(C), pages 86-106.
    6. Fong, Wai Mun, 2013. "Footprints in the market: Hedge funds and the carry trade," Journal of International Money and Finance, Elsevier, Elsevier, vol. 33(C), pages 41-59.

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