Yield curve risks in currency carry forwards

Seungho Baek, Jeong Wan Lee, Kyong Joo Oh, Myoungji Lee

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

We provide empirical evidence that cross-country yield curve gaps (parallel gap, twist gap, and butterfly gap) are predictive to the expected currency carry premiums using currency forward contracts. We find that the expected currency gains are more notable as these yield curve risk factors at time t indicate short-term bond prices of investment currencies to go up (positive parallel movement, negative twist, and positive butterfly). We also find carry gains are more sensitively affected by cross-country monetary shocks than currency-country inflation pressures and business cycles. Our findings support that cross-country yield curve risk premiums still exist even after considering transaction costs.

Original languageEnglish
Pages (from-to)651-670
Number of pages20
JournalJournal of Futures Markets
Volume40
Issue number4
DOIs
Publication statusPublished - 2020 Apr 1

Bibliographical note

Publisher Copyright:
© 2020 Wiley Periodicals, Inc.

All Science Journal Classification (ASJC) codes

  • Accounting
  • General Business,Management and Accounting
  • Finance
  • Economics and Econometrics

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