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# Carry trade effects in developed and developing countries<br/><span style='font-size: 32px'>The cases of Switzerland and Brazil
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### <span style='font-size: 32px'><a href="https://bttomio.github.io">Bruno Thiago Tomio</a>
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<span style='font-size: 22px; font-weight: bold'>Supervisor
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<br/><span style='font-size: 22px; font-weight: bold'><a href="mailto:guillaume.vallet@univ-grenoble-alpes.fr">Guillaume Vallet</a>
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### <span style='font-size: 22px'>PhD defense | Grenoble, 15<sup>th</sup> February
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# General introduction

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# Financialization of FX markets

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# Two key currencies involved

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# Lack of empirical studies

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# <span style="color:#2541b2; font-weight: bold"> How does carry trade impact the real economy activity?</span>

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# <span style="color:#2541b2; font-weight: bold"> Chapter 1</span> <br/> Research design

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# Carry trade definition

- No generally accepted

- Borrowing and investing (canonical)

- In this thesis, the carry trade is

+ Leveraged

+ Futures market

+ Short (funding) and Long (target)

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# Methodology

- Core is a mix of

+ Reductionism (Chapters 2 and 3) 
  
  + Holism (Chapter 4)

- Epistemology rooted in 
  
  + Realism

+ Skepticism

+ Empiricism

+ Principle of parsimony

- Reproducible research

+ Stata (Chapters 2 and 3)
  
  + R (Chapter 4 and manuscript/presentation)

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# Data

- Volume approach, instead of prices

- Weekly CFTC data

- Best public data

- Limitations

+ Small proportion

+ Classify traders, not activity
  
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+ Short data range for Brazil

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# Structure

- Three papers/articles (could be read separately)

- Inspired on (data and carry trade measure)

+ **`Chapter 2.`**, Nishigaki (2007)

+ **`Chapter 3.`**, Fong (2013)

+ **`Chapter 4.`**, Brunnermeier, Nagel, and Pedersen (2008)

- My own development as an economist

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# <span style="color:#2541b2; font-weight: bold"> Three articles</span> <br/> Overview and main results

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# Chapter 2
<span style='font-size: 22px; font-weight: bold'> **`Carry trade in developing and developed countries`**</style> <br/> <span style='font-size: 16px; font-weight: bold'>**`A Granger causality analysis with the Toda-Yamamoto approach (Economics Bulletin, 2020)`**</style>

- Ten currencies

- Monetary easing and tightening in the U.S. (12/2008 - 06/2019)

- Granger causality with the Toda-Yamamoto approach (long-term relationship, carry trade | financial variables)

- Common evidence

+ Exchange rate as a carry trade predictor

+ Carry trade Granger causes market sentiment (systemic risk spillovers)

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# Chapter 3
<span style='font-size: 22px; font-weight: bold'> **`Carry trade and negative interest rate policy in Switzerland`**</style> <br/> <span style='font-size: 16px; font-weight: bold'>**`Low-lying fog or storm? (with Guillaume Vallet | under review, JBF)`**</style>

- Swiss franc carry trade with $, €, ¥, and £ as targets (bilateral analysis)

- Period of negative interest rate policy (12/2014 - 11/2020)

- Structural vector-autoregressive (SVAR) model with Cholesky identification

- Main evidence of the franc as a

1. **`funding`** currency

+ uncovered interest rate parity (UIP) does not hold (USD, EUR and JPY)

2. **`safe haven`** currency

+ Swiss franc carry trade responds positively to an increase in VIX (GBP)
  
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- Hedge funds are able to move asset prices

- Higher Swiss franc carry trade activity contributes to an increased systemic risk

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# Chapter 4
<span style='font-size: 22px; font-weight: bold'> **`The political economy of carry trade`**</style> <br/> <span style='font-size: 18px; font-weight: bold'>**`The real economy got carried away in Switzerland and Brazil`**</style>

- World economy is proxied with 21 countries and the Euro area (84% of global nominal output)

- Monthly and quarterly models (roughly)

+ Switzerland (2006 to 2021)
  
  + Brazil (2012 to 2021)

- Two measures of global risk

+ Market sentiment (VIX)
  
  + Global common factor (GCF), created by Miranda-Agrippino

- Bayesian global vector autoregressive model (BGVAR)

- Negative carry trade effects in both countries (main hypothesis)

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<span style='font-size: 30px; font-weight: bold'>Switzerland, negative shock on carry trade</style>
<img src="./Ch4-CH.png" width="80%" style="display: block; margin: auto;" />

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<span style='font-size: 30px; font-weight: bold'>Brazil, positive shock on carry trade</style>
<img src="./Ch4-BR.png" width="85%" style="display: block; margin: auto;" />

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# General conclusion

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# Final remarks

- In general, this thesis **`contributes to a better understanding`** of the carry trade effects in developed and developing countries (notably, Switzerland and Brazil)

- By making all econometric procedures **`reproducible`**, there is a contribution for **`enhanced transparency and ethics`** in Economics

- The **`macro-financial linkages`** remain a field widely open for new developments, wherein this thesis aimed to contribute on exploring the carry trade

- Central banks...

+ need more research to **`tame the negative spillovers`** of monetary policy

+ could **`follow`** the CFTC to create better datasets on futures market

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# Future research on carry trade

- Further investigation on the monetary policy spillovers (e.g. add unemployment)

- Political economy approach, as conducted by Gabor on repo markets (2016) and Ban and Gabor on shadow banking (2016)

- Functional distribution of income and monetary policy and social responsibility of central banks, in line with Elgar Edward's book series edited by Vallet, Rochon and Kappes

- Microstructure and regulation, following Mehrling's Money View

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