What is it about?
The paper explains that the behavior of a Sharpe Ratio proxy for currencies does not work as a carry trade speculation indicator for the Mexican Peso. The evolution of the indicator also shows a mean reverting proccess well captured by a simple ARIMA model. We suggest that Bank of Mexico actively employs these kind of risk/return measures of carry to detect and create countertrend currency speculation measures
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Why is it important?
It is important because it highlights how currency policymakers can act in the market to avoid destabilizing currency especulation strategies like carry trade strategies. During a carry trade period, the target currency usually appreciates considerably over its fundamental value, creating different tensions in the economy that could end up in dutch diseases or overheated local credit/assets markets. On the other hand, in the authors view these type of currency policy mechanisms imply less frictions and restrictions than capital or currency classic controls.
Perspectives
We see this paper as a contribution to the currency policy theory, and could be seing as an empirical analysis of the consequences of shadow currency policies employed by some central banks to curve currency especulation and avoid or reduce momentum and feedback proccesses directed to their currencies.
carlos fernandez herraiz
Universidade da Coruna
Read the Original
This page is a summary of: The role of the enhanced carry to risk on currency policy: the Mexican Peso, Applied Economics, October 2018, Taylor & Francis,
DOI: 10.1080/00036846.2018.1529395.
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