Gagnon and Chaboud (2007) documented that risk reversals increase after episodes of presumed unwinding of carry trades
, in which the Yen is sharply appreciated, meaning that investors are frightened by losses, but they also found that there is no evidence of purchase of protection through risk reversal when carry trade
positions are building up.
the higher-yielding target currency) would appreciate rather than depreciate, while yen would depreciate rather than appreciate due to a large volume of carry trades
that sell yen to buy dollar.
And it is this rally that is rattling the carry trades
We can't say for sure whether this policy will lead to a yen carry trade
and flooding in cheap foreign funds (on the local markets) because there are a lot of stages that such a policy has to go through before leading to actual carry trades
," a senior official at the Bank of Korea said.
As central banks around the world lower interest rates, the gap that carry trade
investors are counting on between low-yielding and high-yielding currencies has narrowed, cutting in the profitability of carry trades
As in all of our work, here we consider a carry-trade strategy that combines individual-currency carry trades
into an equally-weighted portfolio.
The bank said that it was considering action against activities such as carry trades
that involve its short-term deposits that pay more than longer-dated government debt.
That would enhance the yen's appeal as a funding currency of choice amongst investors like hedge funds and model funds, which are increasingly looking to sell the yen and buy high-yielding currencies, called carry trades
Since carry trades
underperform when volatility is high (due to the threat of capital losses that may overwhelm carry income), a rise in volatility is unfavorable for the strategy.
Centre designed to carry trades
education into 21st century
Signs of a rise in speculative interest against the yen were evident in both a rise in dollar/yen turnover and reports of a recent surge in hedge funds' yen carry trades