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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/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. Christiansen, Charlotte & Ranaldo, Angelo & Söderlind, Paul, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7345, C.E.P.R. Discussion Papers.
  2. Alexander, Gordon J. & Chervany, Norman L., 1980. "On the Estimation and Stability of Beta," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 15(01), pages 123-137, March.
  3. John F. O. Bilson, 1980. "The "Speculative Efficiency" Hypothesis," NBER Working Papers 0474, National Bureau of Economic Research, Inc.
  4. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, Elsevier, vol. 13(3), pages 341-360, December.
  5. Aidan Corcoran, 2009. "The Determinants of Carry Trade Risk Premia," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp287, IIIS.
  6. Daniel Kohler, 2007. "Carry Trades: Betting Against Safe Haven," University of St. Gallen Department of Economics working paper series 2007, Department of Economics, University of St. Gallen 2007-12, Department of Economics, University of St. Gallen.
  7. Joseph E. Gagnon & Alain P. Chaboud, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 899, Board of Governors of the Federal Reserve System (U.S.).
  8. 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, American Finance Association, vol. 36(1), pages 43-49, March.
  9. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc.
  10. Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers 47, Society for Economic Dynamics.
  11. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  12. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  13. Drut, Bastien & Brière, Marie, 2009. "The Revenge of Purchasing Power Parity on Carry Trades during Crises," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7743, Paris Dauphine University.
  14. Jose Olmo & Keith Pilbeam, 2009. "The profitability of carry trades," Annals of Finance, Springer, Springer, vol. 5(2), pages 231-241, March.
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