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Foreign exchange investment rules and endogenous currency crashes

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  • Louis Raffestin

    (Larefi - Université Montesquieu - Bordeaux 4)

Abstract

We present a model of the FX market with 3 agents: carry traders, momentum traders, and fundamentalists, where carry traders are subject to funding constraints. We show that the interactions between these agents provide a theoretical base for the empirical observation that exchange rates go up the stairs and down the elevator. Such microstructure eects also help explaining some important puzzles of the FX market such as the exchange rate disconnect from fundamentals and the seemingly abnormal prots to momentum and carry trading.

Suggested Citation

  • Louis Raffestin, 2016. "Foreign exchange investment rules and endogenous currency crashes," Working Papers hal-01277113, HAL.
    • Handle: RePEc:hal:wpaper:hal-01277113
    Note: View the original document on HAL open archive server: https://hal.science/hal-01277113
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    References listed on IDEAS

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    Keywords

    Foreign exchange; currency crashes;

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