IS CARRY TRADE POSSIBLE FOR TURKEY IN THE 2000S?

Carry trade refers to investing in a high-interest currency unit by borrowing from a low-interest currency. According to the UIP-Uncovered Interest Rate Parity- theory, an appreciation of the low valued currency is expected by the same amount as the yield spread between two currencies. These currencies are defined as “funding currency” and “investment currency”. Mostly Japanese Yen and Swiss Franc are used as funding currencies in the world, because of the lowest funding costs. The question this study sought to answer was whether Turkey's financial markets provide a suitable environment for the carry trade along with the increase of capital inflows and floating rate in the 2000s. In this empirical study, a regression was made between the USD/TL parity and the interest rate difference between these currencies. As a result, it is concluded that the explanatory power of model is weak and the correlation is weak between the two variables. Turkey is unfavorable or quite risky for carry trade. This result confirms the theory of UIP for Turkey’s conditions