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

Lu, Helen; Jacobsen, Ben

doi:10.2139/ssrn.2560968

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

61 Pages Posted: 7 Feb 2015 Last revised: 18 Sep 2015

See all articles by Helen Lu

Helen Lu

University of Auckland Business School; University of Auckland - Department of Accounting and Finance

Ben Jacobsen

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

There are 3 versions of this paper

Date Written: September 16, 2015

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; Hong, Torous, & Valkanov, 2007) 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

JEL Classification: G11, G14, F31

Suggested Citation: Suggested Citation

Lu, Helen and Jacobsen, Ben, Cross-Asset Return Predictability: Carry Trades, Stocks and Commodities (September 16, 2015). Available at SSRN: https://ssrn.com/abstract=2560968 or http://dx.doi.org/10.2139/ssrn.2560968