3  4  “Why the yen borrowing game could end in players taking a tumble”, 14 February 2007  BIS Review 25/2007  Figure 5: Risk aversion and market volatility  Source: Bloomberg; DataStream  Perceptions of a relatively benign risk environment have provided the basis for investors to engage in a vast range of so-called “carry trades”.
These involve borrowing to invest in an asset that is either yielding – or is expected to yield – a higher rate of return than the borrowing cost. In this regard, relatively low risk aversion and market volatility are important conditions for carry trades, so that traders are less fearful that sharp market moves could eliminate the expected yield differential.