The Rand as a Carry Trade Target: Risk, Returns and Policy Implications
AbstractWe analyze the returns to targeting the Australian, New Zealand, and South African currencies, through Japanese yen-funded speculation - with a particular focus on the South African rand, for which the carry trade is often seen as a source of exchange rate volatility. Targeting the rand through forward currency speculation produces returns which are as volatile, but with higher mean, and smaller probability of rare but large losses, than a buy-and-hold investment in the stock market - which is stochastically dominated in the second-order sense by the rand-targeting trade; and generates a larger return-to-volatility ratio than the Australian and New Zealand dollars - the two most common carry targets. Speculative positions and debt Â‡ows driven by the carry trade cause an exchange rate process characterized by gradual appreciations punctuated by infrequent but potentially large and rapid depreciations. The consequent level of currency instability is aÂ¤ected by whether inÂ‡ows cause overheating, and how the central bank responds to the associated inÂ‡ationary pressure
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 235.
Length: 30 pages
Date of creation: 2011
Date of revision:
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Currency speculation; carry trade; forward premium; skewness and crash risk; exchange rate instability; capital Â‡ows;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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