Yield curve risks in currency carry forwards

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...

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Veröffentlicht in:The journal of futures markets 2020-04, Vol.40 (4), p.651-670
Hauptverfasser: Baek, Seungho, Lee, Jeong Wan, Oh, Kyong Joo, Lee, Myoungji
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22091