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Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges

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  • Vistesen, Claus

Abstract

Ever 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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File URL: http://mpra.ub.uni-muenchen.de/9952/
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File URL: http://mpra.ub.uni-muenchen.de/15102/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9952.

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Date of creation: 09 Aug 2008
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Handle: RePEc:pra:mprapa:9952

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Keywords: carry trades; currencies; international finance; risk aversion;

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  1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  2. Marie Briere & Bastien Drut, 2009. "The Revenge of Purchasing Power Parity on Carry Trades during Crises," Working Papers CEB 09-013.RS, ULB -- Universite Libre de Bruxelles.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-51, July.
  5. Aidan Corcoran, 2009. "The Determinants of Carry Trade Risk Premia," The Institute for International Integration Studies Discussion Paper Series iiisdp287, IIIS.
  6. Christiansen, Charlotte & Ranaldo, Angelo & Söderlind, Paul, 2011. "The Time-Varying Systematic Risk of Carry Trade Strategies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(04), pages 1107-1125, September.
  7. 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.
  8. Alexander, Gordon J. & Chervany, Norman L., 1980. "On the Estimation and Stability of Beta," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 123-137, March.
  9. Jose Olmo & Keith Pilbeam, 2009. "The profitability of carry trades," Annals of Finance, Springer, vol. 5(2), pages 231-241, March.
  10. Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc.
  11. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc.
  12. Longworth, David, 1981. "Testing the Efficiency of the Canadian-U.S. Exchange Market under the Assumption of no Risk Premium," Journal of Finance, American Finance Association, vol. 36(1), pages 43-49, March.
  13. Joseph E. Gagnon & Alain P. Chaboud, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers 899, Board of Governors of the Federal Reserve System (U.S.).
  14. Daniel Kohler, 2007. "Carry Trades: Betting Against Safe Haven," University of St. Gallen Department of Economics working paper series 2007 2007-12, Department of Economics, University of St. Gallen.
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