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

Yiuman Tse and Lin Zhao
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Yiuman Tse: University of Texas at San Antonio
Lin Zhao: University of Texas at San Antonio

No 5, Working Papers from College of Business, University of Texas at San Antonio

Keywords: Carry trades; US stocks; EGARCH (search for similar items in EconPapers)
JEL-codes: C22 G13 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-02-11
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