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Currency carry trade, crash risk and the role of speculators: evidence from panel data models
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This work project studies the dynamics of carry trade within a sample of developed currency markets. Using univariate and multivariate analysis, I studied the links between interest rates and foreign currency investments. The results obtained are consistent with the hypothesis that there are positive links between interest rate differentials, currency returns and traders’ long positions, and a negative link between interest rates and the conditional skewness. In addition, I also analysed if carry traders act as stabilizers or destabilizers of foreign exchange rates. The results cannot consistently support the hypothesis of under reaction and stabilization advanced by Brunnermeier, Nagel and Pedersen (2008).
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Interest Rates UIP Carry trade Crash risk Interest rate differential