Helen Lu
The University of Auckland
Ben Jacobsen
New Zealand Institute of Advanced Study; Massey University - Department of Economics and Finance, Albany
February 18, 2014
Abstract:
Bakshi and Panayotov (2013) find that commodity price changes predict profits from longing high interest rate currencies (long leg profits) up to three months later. We find that equity returns also predict carry trade profits, but from shorting low interest rate currencies (short leg profits). Equity effects appear to be slightly faster than commodity effects, as equity price rises predict higher short leg profits over the next two months. The predictability is one-directional from commodities and stocks to carry trades. Our evidence supports gradual information diffusion, rather than time-varying risk premia, as the most likely explanation for the predictability results.
(52 page PDF)
HT: CXO Advisory
Effects of Commodities and Stocks on Currency Carry Trades
