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Footprints in the market: Hedge funds and the carry trade

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  • Fong, Wai Mun

Abstract

This paper uses a new database provided by the Commodity and Futures Trading Commissions to examine the price impact of hedge fund carry trades in “hot” and “cold” markets. We find that hedge funds significantly increase their carry trade positions during hot markets (periods with very high currency returns). Consistent with currency overpricing, positions in hot markets are followed by exchange rate reversals. Optimism in the stock market seems to have a spillover effect on hedge fund speculation in the currency market: controlling for the variance risk premium fully accounts for the reversal effect. Overall, our results add to a growing body of empirical evidence that institutional demand can move asset prices.

Suggested Citation

  • Fong, Wai Mun, 2013. "Footprints in the market: Hedge funds and the carry trade," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 41-59.
    • Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:41-59
    DOI: 10.1016/j.jimonfin.2012.09.001
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    More about this item

    Keywords

    Carry trade; Hedge funds; Fund management; Limits to arbitrage; Noise trading; Risk aversion;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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