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Currency Regimes, Volatility Risks, and Carry Trades: The Option Value of Government Currency Intervention in Emerging Markets

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  • Wenliang Guo

Abstract

This study investigates the relationship between cross-sectional carry trade returns and global foreign exchange volatility risk. During periods of high volatility innovations, the average carry trade returns on emerging markets are higher than that of all countries or developed economies. Furthermore, the average returns on managed-float and fixed-rate carry trades are significantly higher than that of free-float carry trade. Government currency intervention in emerging markets can explain these differences. There is an option value in government currency intervention, which can be calculated using an American currency option model with stochastic strikes. This result has policy implications. JEL classification numbers: F31, G12, G18Keywords: Carry Trade, Emerging Markets, Currency Regime, Currency Intervention, Currency Option.

Suggested Citation

  • Wenliang Guo, 2020. "Currency Regimes, Volatility Risks, and Carry Trades: The Option Value of Government Currency Intervention in Emerging Markets," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(3), pages 1-4.
    • Handle: RePEc:spt:apfiba:v:10:y:2020:i:3:f:10_3_4
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    More about this item

    Keywords

    carry trade; emerging markets; currency regime; currency intervention; currency option.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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