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The relationship between currency carry trades and U.S. stocks

✍ Scribed by Yiuman Tse; Lin Zhao

Publisher: John Wiley and Sons
Year: 2011
Tongue: English
Weight: 533 KB
Volume: 32
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20516

No coin nor oath required. For personal study only.

✦ Synopsis

The article examines the relationship between daily returns of currency carry trades and U.S. stocks from January 1995 through September 2010. Carry trade and stock returns are highly correlated with no Granger‐causality in either direction. An EGARCH model shows that significant volatility spillovers flow from the stock market to the carry‐trade market, but not vice versa. The markets are more correlated in periods of high volatility. Volatilities in both markets also increase more with negative innovations than positive innovations. A sectoral analysis of the index suggests that volatilities of cyclical stocks have more impact than noncyclical stocks on carry trades.

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