The Chilean peso exchange-rate carry trade and turbulence

Cox, Paulo
Carreño, José Gabriel

2016-12

LC/G.2694-P
4

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In this study we provide evidence regarding the relationship between the Chilean peso carry trade and currency crashes of the peso against other currencies. Using a rich dataset containing information from the local Chilean forward market, we show that speculation aimed at taking advantage of the recently large interest rate differentials between the peso and developedcountry currencies has led to several episodes of abnormal turbulence, as measured by the exchange-rate distribution’s skewness coefficient. In line with the interpretative framework linking turbulence to changes in the forward positions of speculators, we find that turbulence is higher in periods during which measures of global uncertainty have been particularly high.

CURRENCY INSTABILITY; FOREIGN EXCHANGE MARKETS; SPECULATION; FOREIGN EXCHANGE RATES; CURRENCY; ESPECULACION; MERCADOS DE DIVISAS; INESTABILIDAD MONETARIA; TIPOS DE CAMBIO; MONEDAS;