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UIP, the Carry Trade and Minsky’s Financial Instability Hypothesis in the CEE and CIS

In: Poland and the Eurozone

Author

Listed:
  • Robert Hayward
  • Jens Hölscher

Abstract

The carry trade is the attempt to take advantage of deviations from uncovered interest parity (UIP). UIP asserts that, given the free flow of capital, the expected change in an exchange rate over a specific period should be equal to the interest rate differential for the two currencies for the same period. If this is not the case, there is an opportunity to make an abnormal return, using the carry trade, by borrowing a low interest-rate currency and investing the proceeds in one where rates are relatively high. A large body of evidence suggests that UIP does not hold.

Suggested Citation

  • Robert Hayward & Jens Hölscher, 2014. "UIP, the Carry Trade and Minsky’s Financial Instability Hypothesis in the CEE and CIS," Studies in Economic Transition, in: Jens Hölscher (ed.), Poland and the Eurozone, chapter 7, pages 111-138, Palgrave Macmillan.
    • Handle: RePEc:pal:stuchp:978-1-137-42641-3_7
    DOI: 10.1057/9781137426413_7
    as

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