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Determinants of carry trades in Central and Eastern Europe

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  • Hoffmann, Andreas

Abstract

In this paper, I analyze determinants of carry trade returns in Central and Eastern Europe (CEE). I show that carry trades to CEE were lucrative due to interest rate spreads between the funding and investment currency from 2004 to 2006. They became unprofitable when liquidity risk and exchange rate volatility increased after 2007. The analysis suggests that the exchange rate regime of the CEE economy matters for carry trade returns. Overall, exchange rate stabilization, particularly via managed floats, seems to allow for the highest profit opportunities.

Suggested Citation

  • Hoffmann, Andreas, 2011. "Determinants of carry trades in Central and Eastern Europe," Working Papers 102, University of Leipzig, Faculty of Economics and Management Science.
  • Handle: RePEc:zbw:leiwps:102
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    References listed on IDEAS

    as
    1. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
    2. Andreas Hoffmann & Gunther Schnabl, 2011. "A Vicious Cycle of Manias, Crises and Asymmetric Policy Responses – An Overinvestment View," The World Economy, Wiley Blackwell, vol. 34(3), pages 382-403, March.
    3. Paul Grauwe & Gunther Schnabl, 2004. "EMU entry strategies for the new member states," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 39(5), pages 241-246, September.
    4. Eling, Martin & Schuhmacher, Frank, 2007. "Does the choice of performance measure influence the evaluation of hedge funds?," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2632-2647, September.
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    Citations

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    Cited by:

    1. Coudert, Virginie & Mignon, Valérie, 2013. "The “forward premium puzzle” and the sovereign default risk," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 491-511.
    2. Juan Carlos Cuestas & Fabio Filipozzi & Karsten Staehr, 2015. "Uncovered Interest Parity in Central and Eastern Europe: Sample, Expectations and Structural Breaks," Working Papers 2015014, The University of Sheffield, Department of Economics.
    3. Hoffmann, Andreas & Löffler, Axel, 2014. "Low interest rate policy and the use of reserve requirements in emerging markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 307-314.
    4. repec:bla:reviec:v:25:y:2017:i:4:p:695-710 is not listed on IDEAS
    5. Juan Carlos Cuestas & Fabio Filipozzi & Karsten Staehr, 2017. "Uncovered interest parity in Central and Eastern Europe: Expectations and structural breaks," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 695-710, September.
    6. Kim, Suk-Joong, 2015. "Australian Dollar carry trades: Time varying probabilities and determinants," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 64-75.
    7. Auer, Benjamin R. & Hoffmann, Andreas, 2016. "Do carry trade returns show signs of long memory?," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 201-208.

    More about this item

    Keywords

    carry trades; emerging markets; exchange rates;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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