Endogenous currency crashes

Mardi | 2016-10-18
16-17h20 en salle des thèses


We present a model of the FX market with 3 agents: carry traders, momentum traders, and fundamentalists, where carry traders are subject to funding constraints. We show that the interactions between these agents provide a theoretical base for the empirical observation that exchange rates go up the stairs and down the elevator. Such microstructure effects also help to explain some of the puzzles of the FX market, such as the exchange rate disconnect from fundamentals and the seemingly abnormal profits to momentum and carry trading.