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What can the data tell us about carry trades in Japanese yen?

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Author Info
Joseph E. Gagnon
Alain P. Chaboud

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Abstract

This paper examines the available data that may shed light on the carry trade in Japanese yen. We define an individual or a sector to be engaged in the carry trade if it has a short position in yen and a long position in other currencies. The tendency of large yen movements to be skewed toward appreciations is consistent with the existence of substantial carry positions, and other evidence from market prices provides some modest support for an effect from the carry trade. Data on bank loans and bond holdings by currency reveal a large apparent yen carry position of the Japanese official sector and modest carry positions in the Japanese and foreign banking sectors. The Japanese private non-banking sector has a large long foreign-currency position, but does not have a short yen position, and is thus not engaged in the yen carry trade in the aggregate. However, it is possible that exporters and investors in Japan use the derivatives markets to hedge some of their long foreign-currency exposure, with the private non-banking sector outside of Japan (including most hedge funds) likely to be taking on most of the associated carry exposure.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 899.

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Date of creation: 2007
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Handle: RePEc:fip:fedgif:899

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Keywords: Foreign exchange rates ; Yen; Japanese ; Interest rates;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2006. "The Returns to Currency Speculation," NBER Working Papers 12489, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier. [Downloadable!] (restricted)
  3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  4. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Thomas Klitgaard & Laura Weir, 2004. "Exchange rate changes and net positions of speculators in the futures market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 17-28. [Downloadable!]
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  1. Vistesen, Claus, 2009. "Carry Trade Fundamentals and the Financial Crisis 2007-2010," MPRA Paper 9952, University Library of Munich, Germany. [Downloadable!]
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  2. Tobias Adrian & Erkko Etula & Hyun Song Shin, 2009. "Global liquidity and exchange rates," Staff Reports 361, Federal Reserve Bank of New York. [Downloadable!]
  3. Zsolt Darvas, 2008. "Leveraged carry trade portfolios," Working Papers 0802, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest, revised 18 Jun 2008. [Downloadable!]
    Other versions:
  4. Marie Brière & Bastien Drut, 2009. "The Revenge of Purchasing Power Parity on Carry Trades during Crises," Working Papers CEB 09-013.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  5. Corinne Winters, 2008. "The Carry Trade, Portfolio Diversification, and the Adjustment of the Japanese Yen," Discussion Papers 08-2, Bank of Canada. [Downloadable!]
  6. Paul Soderlind & Angelo Ranaldo & Charlotte Christiansen, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," University of St. Gallen Department of Economics working paper series 2009 2009-06, Department of Economics, University of St. Gallen. [Downloadable!]
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  7. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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