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Carry-trades on the yen and the Swiss franc: are they different?

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  • André Mollick
  • Tibebe Assefa

Abstract

Using monthly data from 1986 to 2009 for 11 major currencies against the U.S. dollar (USD), we find that interest rate differentials between nine of these currencies are generally positive (sample mean of 0.86%) but are strongly negative for Japan (mean of −2.78%) and for Switzerland (mean of −2.22%). Investigating empirical models of nominal exchange rate changes we find for all panels that about 2% of real exchange rate misalignments are corrected in the following month. We also find important differences across samples and for the two carry-trade currencies the key results are as follows. First, interest rate differentials have a negative impact on exchange rates: higher paying currencies should appreciate, contrary to the ex-ante uncovered interest rate parity (UIP) condition. We find that this result is very robust to money supply (M1) differentials serving as instrumental variables to inflation rates. In addition, these two currencies depreciate slightly when money supply (M1) differentials increase. Second, dummy variables for periods of market turmoil suggest a particularly strong appreciation of these currencies against the USD, consistent with the unwinding of carry-trade activities. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • André Mollick & Tibebe Assefa, 2013. "Carry-trades on the yen and the Swiss franc: are they different?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(3), pages 402-423, July.
    • Handle: RePEc:spr:jecfin:v:37:y:2013:i:3:p:402-423
    DOI: 10.1007/s12197-011-9194-7
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    Cited by:

    1. Lars P. Feld & Ekkehard A. Köhler, 2015. "Is Switzerland an Interest Rate Island after all? Time Series and Non-Linear Switching Regime Evidence," CESifo Working Paper Series 5628, CESifo.
    2. Peng, Wei & Hu, Shichao & Chen, Wang & Zeng, Yu-feng & Yang, Lu, 2019. "Modeling the joint dynamic value at risk of the volatility index, oil price, and exchange rate," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 137-149.
    3. Mollick, André Varella & Sakaki, Hamid, 2019. "Exchange rates, oil prices and world stock returns," Resources Policy, Elsevier, vol. 61(C), pages 585-602.

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    More about this item

    Keywords

    Carry-Trade; Exchange Rates; Foreign Exchange Crisis; Interest Rate Differentials; F31; F41;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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