Vistesen, Claus (2008): Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges.
Download (160Kb) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges|
|Keywords:||carry trades;currencies;international finance;risk aversion;|
|Subjects:||F - International Economics > F3 - International Finance|
|Depositing User:||Claus Vistesen Vistesen|
|Date Deposited:||11. Aug 2008 00:05|
|Last Modified:||19. Feb 2013 00:29|
Alexander, J. Gordon & Chervany, L. Norman (1980) – On the Estimation and Stability of Beta, The Journal of Financial and Quantitative Analysis vol. 15 no. 1 (march 1980) pp. 123-137
Bilson, John (1980) – The Speculative Efficiency Hypothesis, Journal of Business vol. 54 (June) pp. 433-451
Capiello, L. & R. A. De Santis (2007) – The Uncovered Equity Return Parity Condition, ECB Working Paper No. 812.
Chinn, D. Menzie & Meredith, Guy (2004) – Monetary Policy and Long Run Horizon Uncovered Interest Parity, IMF Staff Paper vol. 51 no 3
Chow, C. Gregory (1960) – Tests of Equality Between Sets of Coefficients in Two Linear Regressions, Econometrica vol. 28 no. 3 (1960) pp. 591-605
De Santis, A. Roberto & Sarno, Lucio (2008) – Assesing the Benefits of International Portfolio Diversification in Bonds and Stocks, ECB Working Paper no. 883 (March 2008)
Edwin J. Elton et al. (2007) – Modern Portfolio Theory and Investment Analysis, John Wiley and Sons Incorporated 7th Edition 2007
Granger, C. W. J. (1969) – Investigating Causal Relations by Econometric Models and Cross Spectral Methods, Econometrica (July 1969) pp. 424-438
Gujarati, Damodar N. (2003) – Basic Econometrics 4th edition McGraw Hill
Hau, H, & H, Rey (2004) – Can Portfolio Rebalancing Explain The Dynamics of Equity Returns Flows, and Exchange Rates? American Economic Review Papers and Proceedings 94: 126-133.
Hau, H, & H, Rey (2006) – Exchange Rates, Equity Prices, and Capital Flows, Review of Financial Studies 19; 273-317.
Longworth, David (1981) – Testing the Efficiency of the Canadian–U.S. Exchange Market Under the Assumption of No Risk Premium, Journal of Finance, Vol. 36, No. 1, pp. 43–9
Meese, Richard (1989) – Empirical Assessment of Foreign Currency Risk Premiums,” in Financial Risk: Theory, Evidence, and Implications, ed. by Courtenay Stone (Boston: Kluwer Academic Publications)
Olmo, Jose & Pilbeam, Keith (2008) – The Profitability of Carry Trades, Annals of Finance 11 April 2008
Rogoff, Kenneth (1983) – Empirical Exchange Rate Models of the Seventies, Journal of International Economics, Vol. 14 (February), pp. 3–24
Sharpe, W. F. (1964) – Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, Journal of Finance (September 1964) pp. 425-442
Zimmermann H. et al. (2003) – Global Asset Allocation: New Methods and Applications (chapter 3), John Wiley and Sons inc
Available Versions of this Item
- Of Low Yielders and Carry Trading – the JPY and CHF as Market Risk Sentiment Gauges. (deposited 11. Aug 2008 00:05) [Currently Displayed]