Yen carry trades and stock returns in target currency countries
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. âº Three different proxies for carry trade activity; namely, a currency-specific profit measure, a currency-specific futures position variable, and the Deutsche Harvest Index are used to examine the effect of yen carry trade on stock returns in five selected target currency countries. âº These proxies exhibit various degrees of incremental explanatory power for stock returns in common target countries. âº The empirical effects are robust to the presence of control variables including the US stock return, the VIX index, and commodity prices.