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Cross-asset return predictability: Carry trades, stocks and commodities

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  • Lu, Helen
  • Jacobsen, Ben

Abstract

Equity returns predict carry trade profits from shorting low interest rate currencies. Commodity price changes predict profits from longing high interest rate currencies. The gradual information diffusion hypothesis (Hong & Stein, 1999) provides a ready explanation for these predictability results. These results cannot be explained by time-varying risk premia as stock returns and commodity price changes significantly predict negative carry trade profits. The predictability is one-directional, from commodities to high interest rate currencies, from commodities to stocks and from stocks to low interest rate currencies.

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  • Lu, Helen & Jacobsen, Ben, 2016. "Cross-asset return predictability: Carry trades, stocks and commodities," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 62-87.
    • Handle: RePEc:eee:jimfin:v:64:y:2016:i:c:p:62-87
    DOI: 10.1016/j.jimonfin.2016.02.013
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    4. Chang‐Che Wu & MeiChi Huang & Chih‐Chiang Wu, 2021. "The role of asymmetry and dynamics in carry trade and general financial markets," The Financial Review, Eastern Finance Association, vol. 56(2), pages 331-353, May.
    5. Xiao, Jihong & Hu, Chunyan & Ouyang, Guangda & Wen, Fenghua, 2019. "Impacts of oil implied volatility shocks on stock implied volatility in China: Empirical evidence from a quantile regression approach," Energy Economics, Elsevier, vol. 80(C), pages 297-309.
    6. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
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    More about this item

    Keywords

    Carry trade; Gradual information diffusion; Return predictability; Safe-haven currencies; Time-varying risk premium; Vector auto regression;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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