Technology Diffusion and Currency Carry Trades

53 Pages Posted: 14 Dec 2015 Last revised: 6 May 2016

Ilias Filippou

University of Warwick

Date Written: May 5, 2016

Abstract

The paper identifies a unique dimension of currency carry trades that it is related to the intensity of technology transition across countries. Particularly, I show that technology diffusion is a fundamental determinant of currency premia and it is priced in the cross-section of currency excess returns. Technology spillovers are measured based on the R&D concentration as well as the inflows of foreign direct investment (FDI) that are associated with domestic patents owned by foreign investors. Intuitively, carry traders require a risk premium for financing risky innovation in countries with high patent related FDI inflows. Similarly, a positive risk premium is obtained from countries with high concentration of technology transition as investment currencies are subject to the R&D of the funding countries.

Keywords: Technology Adaption, Comparative Advantage, Currency Risk premium

JEL Classification: F31; G11; O32; O34

Suggested Citation

Filippou, Ilias, Technology Diffusion and Currency Carry Trades (May 5, 2016). Available at SSRN: https://ssrn.com/abstract=2702477 or http://dx.doi.org/10.2139/ssrn.2702477

Ilias Filippou (Contact Author)

University of Warwick ( email )

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HOME PAGE: http://sites.google.com/site/ifilippou1/

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