Cross-asset return predictability: Carry trades, stocks and commodities

Helen Lu and Ben Jacobsen

Journal of International Money and Finance, 2016, vol. 64, issue C, 62-87

Abstract: Equity returns predict carry trade profits from shorting low interest rate currencies. Commodity price changes predict profits from longing high interest rate currencies. The gradual information diffusion hypothesis (Hong & Stein, 1999) provides a ready explanation for these predictability results. These results cannot be explained by time-varying risk premia as stock returns and commodity price changes significantly predict negative carry trade profits. The predictability is one-directional, from commodities to high interest rate currencies, from commodities to stocks and from stocks to low interest rate currencies.

Keywords: Carry trade; Gradual information diffusion; Return predictability; Safe-haven currencies; Time-varying risk premium; Vector auto regression (search for similar items in EconPapers)
JEL-codes: F31 G11 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:64:y:2016:i:c:p:62-87

DOI: 10.1016/j.jimonfin.2016.02.013

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