Yen carry trades and stock returns in target currency countries

Yan Leung Stephen CHEUNG, Yin-Wong CHEUNG, Angela W.W. HE

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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. Copyright © 2012 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)174-183
JournalJapan and the World Economy
Volume24
Issue number3
DOIs
Publication statusPublished - Aug 2012

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currency
stock market
Currency
Stock returns
Carry trade
proliferation
commodity
New Zealand
assets
bank
profit
Mexico
inclusion
Canada
market

Citation

Cheung, Y.-L., Cheung, Y.-W., & He, A. W. W. (2012). Yen carry trades and stock returns in target currency countries. Japan and the World Economy, 24(3), 174-183. doi: 10.1016/j.japwor.2012.01.010

Keywords

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