The Relationship between Currency Carry Trades and U.S. Stocks 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 non-cyclical stocks on carry trades
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More about this item
KeywordsCarry trades; US stocks; EGARCH;
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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