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Footprints in the market: Hedge funds and the carry trade

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  • Fong, Wai Mun
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    Abstract

    This paper uses a new database provided by the Commodity and Futures Trading Commissions to examine the price impact of hedge fund carry trades in “hot” and “cold” markets. We find that hedge funds significantly increase their carry trade positions during hot markets (periods with very high currency returns). Consistent with currency overpricing, positions in hot markets are followed by exchange rate reversals. Optimism in the stock market seems to have a spillover effect on hedge fund speculation in the currency market: controlling for the variance risk premium fully accounts for the reversal effect. Overall, our results add to a growing body of empirical evidence that institutional demand can move asset prices.

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    File URL: http://www.sciencedirect.com/science/article/pii/S026156061200160X
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 33 (2013)
    Issue (Month): C ()
    Pages: 41-59

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    Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:41-59

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Carry trade; Hedge funds; Fund management; Limits to arbitrage; Noise trading; Risk aversion;

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