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 of old.
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.
long bond on fears that the new Federal Reserve Chairman would raise rates further for longer than was previously expected, and the change in monetary policy at the Bank of Japan with the implications that has for
carry trades around the world.
