The Special FX Market
41 Pages Posted: 5 Jun 2017 Last revised: 21 Jun 2017
Date Written: June 3, 2017
We present a model of the foreign exchange market with 2 types of investors: cash-constrained carry traders, and short-sighed boundedly rational technical traders. We show that the interactions between both agents explain several of the well-documented puzzles of the exchange rate. In particular, the model provides a theoretical base for the fact that currencies of high interest rate countries tend to crash, sometimes without a clear fundamental trigger.
Keywords: Currency Crashes, Microstructure Effects, Technical Trading, Carry Trade, Funding Constraints
JEL Classification: E44, F31, G01, G17
Suggested Citation: Suggested Citation