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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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:
Contact details of provider:
Postal: Newlands on Main, F0301 3rd Floor Mariendahl House, cnr Campground and Main Rds, Claremont, 7700 Cape Town
Phone: 021 671-3980
Fax: +27 21 671 3912
Web page: http://www.econrsa.org/
More information through EDIRC
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
This paper has been announced in the following NEP Reports:
- NEP-AFR-2011-09-05 (Africa)
- NEP-ALL-2011-09-05 (All new papers)
- NEP-IFN-2011-09-05 (International Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Mitchell & Lasse Heje Pedersen & Todd Pulvino, 2007.
"Slow Moving Capital,"
NBER Working Papers
12877, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2007.
"The Returns to Currency Speculation in Emerging Markets,"
CEPR Discussion Papers
6148, C.E.P.R. Discussion Papers.
- Martin Eichenbaum & Craig Burnside & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," American Economic Review, American Economic Association, vol. 97(2), pages 333-338, May.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," NBER Working Papers 12916, National Bureau of Economic Research, Inc.
- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
- Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February.
- Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
- Barberis, Nicholas & Thaler, Richard, 2003.
"A survey of behavioral finance,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128
- Gromb, Denis & Vayanos, Dimitri, 2010.
"Limits of Arbitrage: The State of the Theory,"
CEPR Discussion Papers
7738, C.E.P.R. Discussion Papers.
- Craig Burnside, 2011. "Carry Trades and Risk," NBER Working Papers 17278, National Bureau of Economic Research, Inc.
- Taylor, Mark P, 1987. "Covered Interest Parity: A High-Frequency, High-Quality Data Study," Economica, London School of Economics and Political Science, vol. 54(216), pages 429-38, November.
- Charles Engel, 1996.
"The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence,"
NBER Working Papers
5312, National Bureau of Economic Research, Inc.
- Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
- Dilip Abreu & Markus K. Brunnermeier, 2003.
"Bubbles and Crashes,"
Econometric Society, vol. 71(1), pages 173-204, January.
- Emmanuel Farhi, 2008.
"Rare Disasters and Exchange Rates,"
2008 Meeting Papers
47, Society for Economic Dynamics.
- Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
- Joseph E. Gagnon & Alain P. Chaboud, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers 899, Board of Governors of the Federal Reserve System (U.S.).
- Acharya, Viral V. & Shin, Hyun Song & Yorulmazer, Tanju, 2009. "A Theory of Slow-Moving Capital and Contagion," CEPR Discussion Papers 7147, C.E.P.R. Discussion Papers.
- Richard Clarida & Josh Davis & Niels Pedersen, 2009.
"Currency Carry Trade Regimes: Beyond the Fama Regression,"
NBER Working Papers
15523, National Bureau of Economic Research, Inc.
- Clarida, Richard & Davis, Josh & Pedersen, Niels, 2009. "Currency carry trade regimes: Beyond the Fama regression," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1375-1389, December.
- Ryans Bartens & Shakill Hassan, 2009. "Value, Size and Momentum Portfolios in Real Time: The Cross-Section of South African Stocks," Working Papers 154, Economic Research Southern Africa.
- U. Michael Bergman & Shakill Hassan, 2008. "Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case," EPRU Working Paper Series 08-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Plantin, Guillaume & Shin, Hyun Song, 2011. "Carry Trades, Monetary Policy and Speculative Dynamics," CEPR Discussion Papers 8224, C.E.P.R. Discussion Papers.
- Aron, Janine & Farrell, Greg & Muellbauer, John & Sinclair, Peter, 2010. "Exchange Rate Pass-through and Monetary Policy in South Africa," CEPR Discussion Papers 8153, C.E.P.R. Discussion Papers.
- Robert P. Flood & Andrew K. Rose, 2002. "Uncovered Interest Parity in Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 6.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yoemna Mosaval).
If references are entirely missing, you can add them using this form.