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A stochastic dominance analysis of yen carry trades

  • Fong, Wai Mun
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    Yen carry trades have made headline news for over a decade. We examine the profitability of such trades for the period 2001-2009. Yen carry trades generated high mean returns and Sharpe ratios prior to the recent financial crisis. They continued to outperform major stock markets for the full sample period. Given the non-normality of carry trade returns, we apply non-parametric tests based on stochastic dominance (SD) to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on US and global stock market indices. We apply a general test for SD developed recently by Linton, Maasoumi and Whang (2005) to six currencies as well as portfolios of these currencies. For a large class of risk-averse investors, profits from yen carry trades cannot be attributed to risks.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00314-8
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 6 (June)
    Pages: 1237-1246

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1237-1246
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