A strategic market game of carry trades and equilibrium profits

Konstantinos G. Papadopoulos; Leonidas C. Koutsougeras

doi:10.1111/j.1467-9957.2010.02170.x

A strategic market game of carry trades and equilibrium profits

Konstantinos G. Papadopoulos, Leonidas C. Koutsougeras

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

We formalize carry trade in a two-country, two-period general equilibrium strategic market game model of an economy with no uncertainty where agents are not price takers. We show that when carry trade occurs at a Nash equilibrium it is profitable and is identified with the failure of the uncovered interest rate parity condition. Carry trade profits are attributed to asymmetric elasticities in currency or credit markets across time. Furthermore, at equilibrium, real national interest rates may not equalize across countries thus violating the standard international Fisher effect. © 2011 The Authors. The Manchester School © 2011 Blackwell Publishing Ltd and The University of Manchester.

Original language	English
Pages (from-to)	528-541
Number of pages	13
Journal	Manchester School
Volume	79
Issue number	3
DOIs	https://doi.org/10.1111/j.1467-9957.2010.02170.x
Publication status	Published - Jun 2011

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title = "A strategic market game of carry trades and equilibrium profits",

abstract = "We formalize carry trade in a two-country, two-period general equilibrium strategic market game model of an economy with no uncertainty where agents are not price takers. We show that when carry trade occurs at a Nash equilibrium it is profitable and is identified with the failure of the uncovered interest rate parity condition. Carry trade profits are attributed to asymmetric elasticities in currency or credit markets across time. Furthermore, at equilibrium, real national interest rates may not equalize across countries thus violating the standard international Fisher effect. {\textcopyright} 2011 The Authors. The Manchester School {\textcopyright} 2011 Blackwell Publishing Ltd and The University of Manchester.",

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AB - We formalize carry trade in a two-country, two-period general equilibrium strategic market game model of an economy with no uncertainty where agents are not price takers. We show that when carry trade occurs at a Nash equilibrium it is profitable and is identified with the failure of the uncovered interest rate parity condition. Carry trade profits are attributed to asymmetric elasticities in currency or credit markets across time. Furthermore, at equilibrium, real national interest rates may not equalize across countries thus violating the standard international Fisher effect. © 2011 The Authors. The Manchester School © 2011 Blackwell Publishing Ltd and The University of Manchester.

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A strategic market game of carry trades and equilibrium profits

Abstract

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