Carry trade investment strategy and its determinants: The case of Turkey

The carry trade strategy, which defined as borrowing from countries with low interest rates and lending in countries where interest rates are high, has reached quite high important position with the effect of evolving foreign exchange market in recent years. Developed country markets, with its strong economic and financial structure, offer low risky investment opportunities to investors. There are also low return rates for these low-risk countries. Investors that resident of these countries tend to invest in emerging markets which offer higher returns than developed markets. In this context, carry trade stands out as a new investment strategy focusing on making profit from the interest rate differentials between countries. Carry trade investment strategy becomes profitable in the failure of uncovered interest rate parity condition. According to uncovered parity, earnings generated through interest rate differences between countries will be offset by the depreciation of the investment currency. Unlike theory, currency with high interest rates will appreciate rather than depreciating in practice. In this study, relationship between carry trade volume realized on US dollar basis in Turkey and its determinants examined for the period from 2005:M09 to 2018:M08. For the period of analysis; strong causal relationships are found from nominal exchange rate, interest rate differences, volatility index (VIX) and stock market indexes (BIST-100, S&P-500) towards carry trade volume.