Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges
AbstractEver since the credit turmoil took hold in the summer 2007 financial markets have been on the brink. Volatility in asset returns and correlations have been high and investors’ view on the underlying market fundamentals equally as fickle. Within that market context, this paper provides strong evidence for the idea of carry trading currencies as risk sentiment gauges in the market. Using daily returns from 2006 to May 2008 it is shown how traditional carry trading currency crosses (mainly JPY and CHF crosses) exhibit strong negative correlation and beta values with three key equity indices. This paper furthermore shows how this relationship, in relation to specific currency pairs, has been particularly strong since the advent of the credit crisis. Finally, this paper also homes in on the idea of carry trading currencies as means of hedging equity returns and fluctuations on a daily basis. At an initial glance such relationships are however bound to be highly spurious. As such, this paper also attempts to qualify its findings in a more general and solid empirical context.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9952.
Date of creation: 09 Aug 2008
Date of revision:
carry trades; currencies; international finance; risk aversion;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-14 (All new papers)
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