Speculative Capital and Currency Carry Trades
Imperial College Business School
Aalto University, Department of Finance
June 1, 2010
In this paper, we study a two-country general equilibrium model with partially segmented financial markets, where hedge funds emerge endogenously. Empirically, we show that the hedge fund investment strategy predicted by our model, so called “risk-adjusted carry trade” strategy, explains more than 16% of a broad hedge fund index returns and more than 33% of a fixed income arbitrage sub-index returns. The flow of new money to hedge funds affects market interest rates, exchange rate, the both the hedge fund’s contemporaneous and expected future returns as predicted by the model.
Number of Pages in PDF File: 51
Keywords: Hedge funds, carry trades, currency speculation
JEL Classification: F31, G15, E43working papers series
Date posted: April 18, 2008 ; Last revised: March 27, 2011
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