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Carry trade

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  • Kornél Kisgergely

    ()
    (Magyar Nemzeti Bank (central bank of Hungary))

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    Abstract

    This study summarises the basic facts related to the investment strategy known as carry trade. Carry trade is a leveraged investment transaction limited to the foreign exchange market. Foreign investors can only realise extra return if they also assume the risk of exchange rate fluctuations. Carry trade produces high returns for years, but in turbulent periods the accumulated profits of several years can be lost within a matter of weeks. High yielding currencies go through a long period of appreciation, interrupted by sudden strong weakening episodes. Theoretical economists explain stylised facts with the volatility of the risk premium or the liquidity constraints of investors, or with exchange rate bubbles. Foreign investors financing the Hungarian economy did not increase, on aggregate, their exposure to Hungarian forints during the last decade. Consequently, the underlying cause of Hungary’s external indebtedness is most probably not the carry trade activity of foreigners. However, the role of carry trade in the exchange rate dynamics of Hungarian forint may have increased in the last couple of years.

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    File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbszemle/mnben_mnb_bulletin_june_2010/kisgergely_EN.pdf
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    Bibliographic Info

    Article provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.

    Volume (Year): 5 (2010)
    Issue (Month): 2 (June)
    Pages: 31-43

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    Handle: RePEc:mnb:bullet:v:5:y:2010:i:2:p:31-43

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    Web page: http://www.mnb.hu/
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    Related research

    Keywords: carry trade; emerging markets;

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    Cited by:
    1. Valentinyi, Ákos & Bihari, Péter, 2010. "Pirruszi dezinfláció vagy tartósan alacsony inflációs környezet?
      [Pyrrhic deflation or a persistently low-inflation environment?]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 868-875.

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