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Carry trades, agent heterogeneity and the exchange rate

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  • Li, Xiao-Ping
  • Zhou, Chun-Yang
  • Tong, Bin

Abstract

In this paper, we investigate the equilibrium properties of the exchange rate within the framework of a dynamic heterogeneous agent model. Carry traders, fundamentalists and chartists are incorporated into our heterogeneous agent model. We find that carry trading plays an important role in exchange rate markets and can cause an exchange rate to deviate from its fundamental equilibrium. In addition, we use the unscented Kalman filter to estimate the heterogeneous agent model. The results show that carry traders’ activities are significantly affected by the interest rate differential between two currencies.

Suggested Citation

  • Li, Xiao-Ping & Zhou, Chun-Yang & Tong, Bin, 2019. "Carry trades, agent heterogeneity and the exchange rate," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 343-358.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:343-358
    DOI: 10.1016/j.iref.2019.07.001
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    Cited by:

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    3. Li, XiaoPing & Tong, Bin & Zhou, ChunYang, 2020. "Uncertainty aversion, carry trades and agent heterogeneity in the FX market," Finance Research Letters, Elsevier, vol. 36(C).

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