Carry trade within the context of uncovered interest rate parity theory: Comparative analysis of Turkey, BRICS, England and USA

In this thesis, I investigated the main determinants of carry trade activities in Turkey, BRICS, UK and US, the effects of sudden unwiding in carry trade activities on financial and economic variables of so-called countries in the periods when interest rate differentiation and global risk perception are both high and low. For this purpose, I utilized from TVAR methodology allowing the economy to distinguish different regimes due to value of threshold variable. According to the findings, the main determining of carry trade are interest rate differentiation in Turkey, interest rate differentiation, credit default swap and exchange rate uncertainty in BRICS, and both interest rate ane inflation rate differentiations in developed countries during the periods when interest rate differentiation is high. However; interest rate and inflation rate differentiations have positive effects, and exchange rate uncertainty and credit default swap have negative effects on carry trade in Turkey and BRICS while interest rate differantiation is the main factor of carry trade in developed countries during the periods when interest rate differentiation is high. In the periods when global risk perception is high, interest rate differentiations enchance carry trade activities in both developed and developing countries; however, inflation rate differentiations have enchancing-effect on carry trade, exchange rate uncertainty and credit default swap are factors decreasing carry trade in developing countries. In the periods when global risk perception is low, inflation rate and interest rate differentiations and exchange rate volatility increase carry trade; but, credit default swap diminsh it in developing countries. In developed countries, interest rate differentiation is the main factor behind carry trade. Considering the effects of a sudden unwinding in carry trade position on macroeconomic variables, in the case of sudden reversal in carry trade position, it is seen that only interest rate differentiation expands in Turkey in contrast to the other developing countries in the periods when interest rate differentiation is high. Nevertheless, it is seen to tighten for interest rate and inflation rate differentiations and to decrease for exchange rate return and stcok return in BRICS countries. In developed countries, it was proved to expand for interest rate differentiation and to increase for exchange rate return and stock return. In the periods when interest rate differentiation is low, it is followed that sudden reversal in carry trade position generally diminishes exchange rate return and stock return in developing countries and it cause to expand interest rate differantiations in Turkey and India and to tighten interest rate differentiations in Rusia and South Africa. Interest rate differentiation expand, exchange rate returns and stock returns increase in developed countries; inflation rate differentiation tighten in UK and expand in USA due to sudden reversal in carry trade position. In the periods when global risk perception is high, it is seen that interest rate differentiations expand, exchange rate returns decrease, and inflation rate differentiation tighten in developing countries while interest rate differentiations expand and stock returns and exchange rate returns rise in developed countries. In the periods when global risk perception is low, it inferred from the analysis that interest rate differentiations tighten in Turkey and Rusia and expand in Brazil and South Africa, inflation rate differentiations, exchange rate returns and stock returns diminish in Brazil and South Africa. However; interest rate differantiations and exchange rate returns increase in developed countries, but stock returns decrease in UK while increasing in USA.