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Spillovers of currency carry trade returns, market risk sentiment, and U.S. market returns

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  • Lee, Hsiu-Chuan
  • Chang, Shu-Lien

Abstract

This paper examines the link between spillovers of currency carry trade returns and U.S. market returns. Following Tse and Zhao (2012), this paper hypothesizes that the magnitude of spillovers of currency carry trade returns is positively correlated with market risk sentiment and, therefore, has an impact on market returns. Using the G10 currencies and S&P 500 index futures, the empirical results present a high magnitude of spillover effects of currency carry trade markets. The empirical findings also show a significantly positive relationship between spillovers of currency carry trade returns and subsequent market returns. Furthermore, the results indicate that this relationship is stronger in bear markets than in bull markets. Finally, our findings show that spillovers of currency carry trade returns significantly affect the subsequent transition probabilities of market returns.

Suggested Citation

  • Lee, Hsiu-Chuan & Chang, Shu-Lien, 2013. "Spillovers of currency carry trade returns, market risk sentiment, and U.S. market returns," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 197-216.
  • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:197-216
    DOI: 10.1016/j.najef.2013.10.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fernando Fernández-Rodríguez & Marta Gómez-Puig & Simón Sosvilla-Rivero, 2015. "“Financial stress transmission in EMU sovereign bond market volatility: a connectedness analysis”," IREA Working Papers 201508, University of Barcelona, Research Institute of Applied Economics, revised Jan 2015.
    2. Simpson, Marc W. & Grossmann, Axel, 2014. "An examination of the forward prediction error of U.S. dollar exchange rates and how they are related to bid-ask spreads, purchasing power parity disequilibria, and forward premium asymmetry," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 221-238.
    3. Kim, Suk-Joong, 2015. "Australian Dollar carry trades: Time varying probabilities and determinants," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 64-75.
    4. Bekiros, Stelios, 2014. "Nonlinear causality testing with stepwise multivariate filtering: Evidence from stock and currency markets," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 336-348.
    5. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "Volatility spillovers in EMU sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 337-352.
    6. Chen, Chen & Lee, Hsiu-Chuan & Liao, Tzu-Hsiang, 2016. "Risk-neutral skewness and market returns: The role of institutional investor sentiment in the futures market," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 203-225.
    7. Avdoulas, Christos & Bekiros, Stelios & Boubaker, Sabri, 2016. "Detecting nonlinear dependencies in eurozone peripheral equity markets: A multistep filtering approach," Economic Modelling, Elsevier, vol. 58(C), pages 580-587.
    8. Herrera, Rodrigo & Schipp, Bernhard, 2014. "Statistics of extreme events in risk management: The impact of the subprime and global financial crisis on the German stock market," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 218-238.
    9. repec:ucm:wpaper:04-15 is not listed on IDEAS
    10. Liu, Chih-Liang & Yang, Hsin-Feng, 2017. "Systemic risk in carry-trade portfolios," Finance Research Letters, Elsevier, vol. 20(C), pages 40-46.

    More about this item

    Keywords

    Currency carry trade markets; Spillover effects; Market risk sentiment; Generalized VAR model; Markov-switching model;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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