Abstract:

Purpose: This study examines whether the financial markets of the Czech Republic, Russia, Poland, and South Korea offer profitable investment opportunities in terms of carry-trade transactions using a recently developed methodological approach from the literature. Method: In the study, we use the standard Engle–Granger (1987) and Gregory–Hansen (1996) cointegration tests, which can take into account unknown structural breaks, to analyse the long-term relationships between the variables. In addition to the CUSUM (cumulative sum of recursive residuals) and CUSUM SQ (cumulative sum of the squares of recursive residuals) tests, Quandt–Andrews and Bai–Perron (1998, 2003)s tructural break tests are used to detect structural breaks; the sequential F statistic is applied to determine the number of structural breaks. We apply FMOLS (fully modified ordinary least squares) and CCR (canonical cointegrating regression) estimators to estimate the parameters in the long run. Findings: The results show that the Czech and Polish economies do not allow profitable carry-trade transactions, whereas the Russian and South Korean economies offer very low profitability carry-trade transactions. The main reason for this result is that the excess nominal interest rate opportunities these countries offer are fully or highly compensated by reverse movements in the currencies of these countries at the end of the investment period. Originality: First, although the subject attracts considerable attention in the international literature, there are few studies of this subject in the national literature. Second, in this study, instead of examining a single country’s economy, we jointly examine four emerging market economies as well as consider possible structural breaks. Finally, we apply a recently developed methodological approach from the literature in the analyses.

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