Spillovers of currency carry trade returns,market risk sentiment,and U.S. market returns |
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| Institution: | 1. Guangdong University of Finance and Economics, China;2. Yuan Ze University, Taiwan;3. Newhuadu Business School at Minjiang University, China;4. Research Center for Regional Finance and Innovation, Minjiang University, China;1. Izmir University of Economics, Faculty of Business, Department of International Trade and Finance, Sakarya Caddesi No. 156 Balcova, Izmir, 35330, Turkey;2. Izmir University of Economics, Faculty of Business, Department of International Trade and Finance, Sakarya Caddesi No. 156 Balcova, IZMIR, 35330, Turkey;3. Nora International Forwarding Co. Ltd., Head of Investments, Izmir, Turkey;1. CEFAGE-UE, IIFA, Universidade de Évora, Largo dos Colegiais 2, 7000 Évora, Portugal;2. Escola Superior Agrária de Elvas, Instituto Politécnico de Portalegre, Portugal;3. Universidade Europeia, Portugal;4. Institute of Information Theory and Automation, Czech Academy of Sciences, Pod Vodarenskou vezi 4, Prague, CZ-18208, Czech Republic |
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| Abstract: | This paper examines the link between spillovers of currency carry trade returns and U.S. market returns. Following Tse and Zhao (2012), this paper hypothesizes that the magnitude of spillovers of currency carry trade returns is positively correlated with market risk sentiment and, therefore, has an impact on market returns. Using the G10 currencies and S&P 500 index futures, the empirical results present a high magnitude of spillover effects of currency carry trade markets. The empirical findings also show a significantly positive relationship between spillovers of currency carry trade returns and subsequent market returns. Furthermore, the results indicate that this relationship is stronger in bear markets than in bull markets. Finally, our findings show that spillovers of currency carry trade returns significantly affect the subsequent transition probabilities of market returns. |
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| Keywords: | Currency carry trade markets Spillover effects Market risk sentiment Generalized VAR model Markov-switching model |
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