Cross-Asset Return Predictability: Carry Trades, Stocks and Commodities

52 Pages Posted: 22 Feb 2014

See all articles by Helen Lu

Helen Lu

University of Auckland - Department of Accounting and Finance

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Multiple version iconThere are 3 versions of this paper

Date Written: February 21, 2014

Abstract

Bakshi and Panayotov (2013) find that commodity price changes predict profits from longing high interest rate currencies (long leg profits) up to three months later. We find that equity returns also predict carry trade profits, but from shorting low interest rate currencies (short leg profits). Equity effects appear to be slightly faster than commodity effects, as equity price rises predict higher short leg profits over the next two months. The predictability is one-directional from commodities and stocks to carry trades. Our evidence supports gradual information diffusion, rather than time-varying risk premia, as the most likely explanation for the predictability results.

Keywords: Carry Trade, Return Predictability, Safe-haven Currencies, Gradual Information Diffusion

JEL Classification: G11, G14, F31

Suggested Citation

Lu, Helen and Jacobsen, Ben, Cross-Asset Return Predictability: Carry Trades, Stocks and Commodities (February 21, 2014). Available at SSRN: https://ssrn.com/abstract=2399282 or http://dx.doi.org/10.2139/ssrn.2399282

Helen Lu (Contact Author)

University of Auckland - Department of Accounting and Finance ( email )

Private Bag 92019
Auckland 1001
New Zealand

Ben Jacobsen

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Massey University ( email )

Auckland
New Zealand

Register to save articles to
your library

Register

Paper statistics

Downloads
314
Abstract Views
1,833
rank
31,992
PlumX Metrics