Speculative Capital and Currency Carry Trades

51 Pages Posted: 18 Apr 2008 Last revised: 27 Mar 2011

Petri Jylha

Aalto University

Matti Suominen

Aalto University School of Business

Date Written: June 1, 2010

Abstract

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.

Keywords: Hedge funds, carry trades, currency speculation

JEL Classification: F31, G15, E43

Suggested Citation

Jylha, Petri and Suominen, Matti, Speculative Capital and Currency Carry Trades (June 1, 2010). Available at SSRN: https://ssrn.com/abstract=1113812 or http://dx.doi.org/10.2139/ssrn.1113812

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076
Finland

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

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