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A STRATEGIC MARKET GAME OF CARRY TRADES AND EQUILIBRIUM PROFITS *
Author(s) -
PAPADOPOULOS KONSTANTINOS G.,
KOUTSOUGERAS LEONIDAS C.
Publication year - 2011
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2010.02170.x
Subject(s) - carry (investment) , economics , interest rate parity , currency , nash equilibrium , general equilibrium theory , microeconomics , market game , interest rate , monetary economics , macroeconomics
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.