Explanation Of Excess Returns On Carry Trades

Carry trade refers to an investment strategy in which investors borrow the currency of a country with a low interest rate and convert it into a currency of a country with a high interest rate,thereby earning the interest difference.According to the interest rate parity theory,there should be no excess returns in carry trades.However,many literatures have empirically found that the excess returns of carry trades exist significantly.This financial anomaly not only shakes the efficient market hypothesis in theory,but also provides investors with Opportunities to obtain excess returns from arbitrage over a considerable period of time.Therefore,it is of great significance to study the excess return of carry trade.In the aspect of carry trade research,the first problem of this paper is to discuss the test method of carry trade excess return.Based on the uncovered interest rate parity relationship,this paper deduces a regression model for testing excess returns of carry trades,and proposes a hypothesis test based on the range of key coefficients.On this basis,the principle of variable selection is proposed,and finally the parameters are estimated by the time-varying coefficient Markov mechanism transformation model.The conclusions are as follows:(1)The research identifies two states of carry trade.In state 1,the exchange rate has a corrective effect on the carry trade,but it cannot completely offset the interest rate investment of the carry trade;in state 2,both the exchange rate and the market panic drive the currency market to deviate from the equilibrium,resulting in greater excess returns.Generally speaking,state 1 is more likely to occur.(2)The excess returns obtained by the participants in the carry trade from the exchange rate came from the price of the Chinese government maintaining the exchange rate level before 2014.This shows that the government should not easily endorse financial assets in the financial market,otherwise the actions of speculators in the market under unanimous expectations will increase the cost of government maintenance.(3)The role of the exchange rate reform in 2015 is to break the unanimous expectations of investors in the exchange rate market,so that the exchange rate can play the function of maintaining the equilibrium of the currency market.(4)In addition to the risk to the stability of the exchange rate system of sovereign countries,other risks such as settlement currency risk,international payment imbalance risk,and domestic inflation risk in the United States cause long-term premiums.The research innovation is: using the Markov mechanism conversion model to test excess returns,compared with the regression model of the single zone system,the test accuracy is improved,indicating that the determinant behind the change of carry trade returns is the conversion of two policies.In terms of research significance,a new point of view is proposed in theory to explain the causal relationship of excess returns of carry trades,and in practice,it provides a reference for designing the timing system of carry trades.Secondly,this paper studies the short-term characteristics of carry trades.The conjecture put forward in this paper is that the excess returns of carry trades in the short term contain the premium of exchange rate mutation risk.The research content is to use the subordinate process to fit the exchange rate forward,and it is found that the fitting effect of the jump process is better,so that the jump risk of the exchange rate exists through quantitative data,and the market has already expected the exchange rate risk premium.The research innovations are:(1)The model combines the subordinate process and the harmonic steady state process,which has inherent economic significance in terms of time compared with the ordinary jump model;(2)The K* iterative algorithm is proposed in the parameter estimation to solve the problem of excessive parameter dimension and search slow problem.In terms of research significance,theoretically,a new method is proposed for the fitting of exchange rate derivatives,and a new algorithm is proposed to analyze the convergence and stability of the parameter search algorithm;in practice,a new method is provided for long-term data fitting.Thirdly,this paper studies the medium-term characteristics of carry trades.This paper believes that medium-term investment is scientific and forward-looking,so the exchange rate gains of carry trades reflect medium-term investment opportunities.The real option model based on the perspective of central bank and foreign FDI supports the viewpoint of this paper.On the basis of the latter,this paper uses a family of reconciling steady-state processes to characterize Knight’s uncertainty in the process of foreign FDI.In this paper,the real option pricing model is extended to the fractional calculus case,and the conclusion is drawn through numerical simulation that there are two ways to increase the attractiveness of foreign investment to the country,namely,increasing the market level and increasing the growth of income dividends.Research Innovation is the first to discuss the relationship between market level and foreign investment.In terms of research significance,it theoretically describes the real option model under the multi-level market,and in practice provides a theoretical reference for the government to formulate policies to attract foreign investment.Fourthly,this paper studies the long-term characteristics of carry trades.This paper argues that the exchange rate has a negative feedback adjustment function in the long run,which offsets the interest rate gains of carry trades.Since only countries with relatively developed manufacturing industries and competitive export of industrial products can the exchange rate of their currencies have such negative feedback adjustment capabilities,two questions are raised:(1)What position does China occupy in the world state system,and how does it work? Quantitatively determine how similar China is to a typical manufacturing powerhouse?(2)If China is a typical manufacturing country,how to evaluate the effect of the government’s macro-control policies under the impact of the Fed’s interest rate hike cycle and other external shocks? In response to these two problems,the research design and conclusions are as follows:(1)According to the center-periphery system,the quantitative data obtained by HP filtering is used to test the counter-cyclical characteristics of the exchange rate of the quasi-center countries,and it is found that China’s positioning in the system is different from that of the country.Japan,the United Kingdom,the European Union,and Australia are at the same level,showing the characteristics of typical manufacturing countries;(2)Use PID control and consistent integral operator to describe the macro-control behavior,discuss the reasons for the existence of steady-state errors in macro-control,and give the The upper limit of the income of countries participating in macro-control in the presence of selection bias;(3)The processing effect of macro-control behavior of quasi-center countries is calculated by PSM-DID,and the negative feedback effect of export on exchange rate is found through quantitative data research,and its transmission mechanism is in When the exchange rate depreciates,the government controls the export of goods to restore the appreciation of the exchange rate to the original level,thereby effectively coping with the unfavorable situation of the domestic exchange rate weakening due to the reverse liquidation of carry trades.The research innovations include:(1)Describing the macro-control behavior by modeling the steady-state error of the system;(2)estimating the upper bound of the processing effect of participating countries in macro-control under the condition of selection bias in propensity score matching;(3)For the first time,the counterfactual research method is used to obtain the processing effect of macro-control by countries with macro-control capability during the Fed rate hike period.In terms of research significance,the abstract ability of the country’s macro-control ability is theoretically depicted,and the role of this ability in responding to Fed rate hikes and exchange rate negative feedback adjustment is analyzed;practically,it provides policies for the country to formulate policies to deal with exogenous shocks such as Fed rate hike in accordance with.