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

Hsiu-Chuan Lee and Shu-Lien Chang

The North American Journal of Economics and Finance, 2013, vol. 26, issue C, 197-216

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.

Keywords: Currency carry trade markets; Spillover effects; Market risk sentiment; Generalized VAR model; Markov-switching model (search for similar items in EconPapers)
JEL-codes: E40 F30 G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:26:y:2013:i:c:p:197-216

DOI: 10.1016/j.najef.2013.10.001

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