Yen carry trades and stock returns in target currency countries

Stephen Y L CHEUNG, Yin Wong Cheung, Angela W.W. He*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

The proliferation of carry trade - a strategy of simultaneously shorting a low-yielding currency and longing a high-yielding currency raises the concern on its impact on global asset prices. In this exercise, we examine the implications of yen carry trade for stock markets in a few selected target currency countries. Three alternative proxies for carry trade activity - a currency-specific profit measure, a currency-specific futures position variable, and the Deutsche Bank G10 Currency Futures Harvest Index - are used. It is found that the three measures of carry trade display various degrees of influences on stock returns in Australia, Canada, Britain, Mexico, and New Zealand. The empirical carry trade effect is robust to the inclusion of three control variables; namely the US stock return, the VIX Index that represents market volatility, and commodity prices. Further, the estimation results suggest that the three measures of carry trade share some common information about stock returns in target currency countries.

Original languageEnglish
Pages (from-to)174-183
Number of pages10
JournalJapan and the World Economy
Volume24
Issue number3
DOIs
Publication statusPublished - Aug 2012

Scopus Subject Areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

User-Defined Keywords

  • Carry Trade Index
  • Carry trade profit
  • Equity return
  • Futures position
  • VIX

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