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Yield curve risks in currency carry forwards

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  • Seungho Baek
  • Jeong Wan Lee
  • Kyong Joo Oh
  • Myoungji Lee

Abstract

We provide empirical evidence that cross‐country yield curve gaps (parallel gap, twist gap, and butterfly gap) are predictive to the expected currency carry premiums using currency forward contracts. We find that the expected currency gains are more notable as these yield curve risk factors at time t indicate short‐term bond prices of investment currencies to go up (positive parallel movement, negative twist, and positive butterfly). We also find carry gains are more sensitively affected by cross‐country monetary shocks than currency‐country inflation pressures and business cycles. Our findings support that cross‐country yield curve risk premiums still exist even after considering transaction costs.

Suggested Citation

  • Seungho Baek & Jeong Wan Lee & Kyong Joo Oh & Myoungji Lee, 2020. "Yield curve risks in currency carry forwards," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(4), pages 651-670, April.
  • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:4:p:651-670
    DOI: 10.1002/fut.22091
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