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Yield curve risks in currency carry forwards
Author(s) -
Baek Seungho,
Lee Jeong Wan,
Oh Kyong Joo,
Lee Myoungji
Publication year - 2020
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22091
Subject(s) - carry (investment) , yield curve , economics , monetary economics , currency , yield (engineering) , inflation (cosmology) , yield gap , bond , interest rate , financial economics , macroeconomics , finance , materials science , physics , production (economics) , theoretical physics , metallurgy
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.