IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-19-00720.html
   My bibliography  Save this article

Carry trade in developing and developed countries: A Granger causality analysis with the Toda-Yamamoto appr

Author

Listed:
  • Bruno Thiago Tomio

    (Univ. Grenoble Alpes / Univ. de Blumenau)

Abstract

This paper explores the relationship between the carry trade and four related financial variables (interest rate differentials, market sentiment, local stock market indices, and the US stock market index) in ten currencies (Australian Dollar, Brazilian Real, Canadian Dollar, Euro, Great British Pound, Japanese Yen, Mexican Peso, New Zealand Dollar, Russian Ruble, and Swiss Franc). By considering both periods of monetary easing and tightening in the US after the 2008 crisis, I estimate Granger causality tests using the Toda and Yamamoto (1995) approach. Additionally, according to the interest rate differentials between these countries and the US, the currencies are classified as target or funding. Results show relevant differences and similarities in the long-term relationship of these variables for each analysed currency and monetary period in the US. Most importantly, regardless the strength of the US dollar (weak or strong), exchange rate is a good predictor of carry trade activity. Results for the period of monetary tightening (stronger US dollar) show that the carry trade Granger causes the market sentiment and local stock market indices. Therefore, a hawkish monetary policy in the US may be a source of systemic risk considering its effects on the carry trade.

Suggested Citation

  • Bruno Thiago Tomio, 2020. "Carry trade in developing and developed countries: A Granger causality analysis with the Toda-Yamamoto appr," Economics Bulletin, AccessEcon, vol. 40(3), pages 2154-2164.
    • Handle: RePEc:ebl:ecbull:eb-19-00720
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I3-P188.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:ebl:ecbull:v:13:y:2007:i:2:p:1-7 is not listed on IDEAS
    2. Nicholas Mulligan & Daan Steenkamp, 2018. "Reassessing the information content of the Commitments of Traders positioning data for exchange rate changes," Reserve Bank of New Zealand Analytical Notes series AN2018/03, Reserve Bank of New Zealand.
    3. Doskov, Nikolay & Swinkels, Laurens, 2015. "Empirical evidence on the currency carry trade, 1900–2012," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 370-389.
    4. Thomas Klitgaard & Laura Weir, 2004. "Exchange rate changes and net positions of speculators in the futures market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 17-28.
    5. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    6. Thomas Goda & Jan Priewe, 2020. "Determinants of real exchange rate movements in 15 emerging market economies," Brazilian Journal of Political Economy, Center of Political Economy, vol. 40(2), pages 214-237.
    7. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
    8. Cenedese, Gino & Sarno, Lucio & Tsiakas, Ilias, 2014. "Foreign exchange risk and the predictability of carry trade returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 302-313.
    9. Hideki Nishigaki, 2007. "Relationship between the yen carry trade and the related financial variables," Economics Bulletin, AccessEcon, vol. 13(2), pages 1-7.
    10. 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.
    11. Matthias Gubler, 2014. "Carry Trade Activities: A Multivariate Threshold Model Analysis," Working Papers 2014-06, Swiss National Bank.
    12. Wenjin Kang & K. Geert Rouwenhorst & Ke Tang, 2020. "A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets," Journal of Finance, American Finance Association, vol. 75(1), pages 377-417, February.
    13. Anusha Chari & Karlye Dilts Stedman & Christian Lundblad, 2017. "Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows," NBER Working Papers 23474, National Bureau of Economic Research, Inc.
    14. Bank for International Settlements, 2015. "Currency carry trades in Latin America," BIS Papers, Bank for International Settlements, number 81, October –.
    15. Amiri, Arshia & Ventelou, Bruno, 2012. "Granger causality between total expenditure on health and GDP in OECD: Evidence from the Toda–Yamamoto approach," Economics Letters, Elsevier, vol. 116(3), pages 541-544.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bruno Thiago Tomio & Guillaume Vallet, 2021. "Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ?," Post-Print halshs-03669561, HAL.
    2. Zhang, Ziyun & Chen, Su & Li, Bo, 2022. "Does previous carry trade position affect following investors' decision-making and carry returns?," International Review of Financial Analysis, Elsevier, vol. 80(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bruno Thiago Tomio, 2019. "Carry trade in developing and developed countries : a Granger-causality analysis with the Toda-Yamamo to approach," Post-Print halshs-03131073, HAL.
    2. Bruno Thiago Tomio & Guillaume Vallet, 2021. "Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ?," Post-Print halshs-03669561, HAL.
    3. Mantzura, Ariel & Schreiber, Ben Z., 2019. "Predicting foreign investors’ carry trade activity in the Israeli FX market using a time-varying currency risk premium approach," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 438-457.
    4. Ali Shehadeh & Peter Erdos & Youwei Li & Michael Moore, 2016. "US Dollar Carry Trades in the Era of "Cheap Money"," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(5), pages 374-404, October.
    5. Matthias Gubler, 2014. "Carry Trade Activities: A Multivariate Threshold Model Analysis," Working Papers 2014-06, Swiss National Bank.
    6. 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.
    7. Adeel Saleem & Ghulam Sarwar & Jahanzaib Sultan & Zulfiqar Ali, 2022. "Determinants of Public Healthcare Investment: Cointegration and Causality Evidence from Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 4(2), pages 01-13.
    8. Cepni, Oguzhan & Emirmahmutoglu, Furkan & Guney, Ibrahim Ethem & Yilmaz, Muhammed Hasan, 2023. "Do the carry trades respond to geopolitical risks? Evidence from BRICS countries," Economic Systems, Elsevier, vol. 47(2).
    9. Nasreen, Samia & Anwar, Sofia & Ozturk, Ilhan, 2017. "Financial stability, energy consumption and environmental quality: Evidence from South Asian economies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 67(C), pages 1105-1122.
    10. Mesbah Fathy SHARAF, 2017. "Energy consumption and economic growth in Egypt: A disaggregated causality analysis with structural breaks," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 46, pages 59-76.
    11. Li, Sisi & Khan, Sufyan Ullah & Yao, Yao & Chen, George S. & Zhang, Lin & Salim, Ruhul & Huo, Jiaying, 2022. "Estimating the long-run crude oil demand function of China: Some new evidence and policy options," Energy Policy, Elsevier, vol. 170(C).
    12. Muntasir Murshed & Mohamed Elheddad & Rizwan Ahmed & Mohga Bassim & Ei Thuzar Than, 2022. "Foreign Direct Investments, Renewable Electricity Output, and Ecological Footprints: Do Financial Globalization Facilitate Renewable Energy Transition and Environmental Welfare in Bangladesh?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(1), pages 33-78, March.
    13. Emilio Colombo & Gianfranco Forte & Roberto Rossignoli, 2019. "Carry Trade Returns with Support Vector Machines," International Review of Finance, International Review of Finance Ltd., vol. 19(3), pages 483-504, September.
    14. Shu-Ping Shi & Stan Hurn & Peter C. B. Phillips, 2016. "Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship," Cowles Foundation Discussion Papers 2059, Cowles Foundation for Research in Economics, Yale University.
    15. Costantini, Valeria & Martini, Chiara, 2010. "The causality between energy consumption and economic growth: A multi-sectoral analysis using non-stationary cointegrated panel data," Energy Economics, Elsevier, vol. 32(3), pages 591-603, May.
    16. Ärshiya Ämiri & Mikael Linden, 2016. "Income and total expenditure on health in OECD countries: Evidence from panel data and Hsiao's version of Granger non-causality tests," Economics and Business Letters, Oviedo University Press, vol. 5(1), pages 1-9.
    17. António Afonso & João Tovar Jalles, 2012. "Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries," Working Papers Department of Economics 2012/29, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    18. Lumengo Bonga-Bonga & Tebogo Maake, 2021. "The Relationship between Carry Trade and Asset Markets in South Africa," JRFM, MDPI, vol. 14(7), pages 1-13, July.
    19. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    20. Gritli, Mohamed Ilyes & Rey, Serge, 2019. "Compte capital et développement financier en Tunisie : Causalité et relation de long terme," L'Actualité Economique, Société Canadienne de Science Economique, vol. 95(4), pages 405-428, Décembre.

    More about this item

    Keywords

    Carry trade; Futures market; Granger causality; Toda–Yamamoto approach;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-19-00720. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.