The developed market currency tango: Carry trade and hedging during 2014 – 2019. VECM and DCC approach

Abstract: In this study carry trade activity in AUD, CAD, EUR and YEN vis the USD between 2014 – 2019 was analysed. The first approach employs a VECM, analyse evidence of carry trade recorded in the exchange rate pairs Futures, Forwards and Spot. Results show evidence of carry with the USD being the target currency, while the others being the funding currency. However, the AUD shows specific traits of carry trade in a reverse manner, since the AUD was yielding higher interest rates than USD. The second part of the analysis investigates evidence of hedging with the help of DCC, where the returns of the currency futures and S&P 500 are used, where S&P 500 represents the USD stock market. The results show evidence of YEN being used as a hedge vis the S&P 500, while the USD shows evidence of hedging vis the AUD and CAD. The EUR case shows evidence of neither directions