Global Asset Market Interdependencies: A Dynamic Interaction

WHU – Otto Beisheim School of Management, Working Paper June 2019

39 Pages Posted: 10 Jul 2019

See all articles by Alex Kusen

Alex Kusen

WHU - Otto Beisheim School of Management

Markus Rudolf

affiliation not provided to SSRN

Date Written: June 13, 2019

Abstract

Currency carry trading presents a widespread trading strategy and refers to the forward premium puzzle. Investors borrow low-yielding currencies with the aim to invest in high-yielding ones in order to benefit from arbitrage opportunities. This implies that a one-to-one relationship does not exist between interest rate differentials and expected changes in exchange rates. On this basis, we explore the interaction between currency carry trade, futures, exchange rates, and commodities through structural shocks. Investors desire a higher risk premium for interest differentials. Therefore, spillovers to prices of futures contracts and an appreciation of exchange rates are in line with the forward premium puzzle. Findings support that currencies with higher interest rates appreciate more often than currencies with lower rates. Furthermore, commodity prices and currency carry trading have a mutual impact due to monetary policy implications as well as real interest rate expectations. However, a simple relationship does not exist and the interconnection is complex in nature.

Keywords: Forward premium puzzle; GVAR; Assets; Shocks

JEL Classification: C32; C53; F31; F37; G12; G15

Suggested Citation

Kusen, Alex and Rudolf, Markus, Global Asset Market Interdependencies: A Dynamic Interaction (June 13, 2019). WHU – Otto Beisheim School of Management, Working Paper June 2019, Available at SSRN: https://ssrn.com/abstract=3403597 or http://dx.doi.org/10.2139/ssrn.3403597

Alex Kusen (Contact Author)

WHU - Otto Beisheim School of Management ( email )

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Markus Rudolf

affiliation not provided to SSRN

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