Yield curve risks in currency carry forwards

Baek, Seung‐Ho; Lee, Jeong Wan; Oh, Kyong Joo; Lee, Myoungji

doi:10.1002/fut.22091

Cited by 5 publications

(1 citation statement)

References 52 publications

(78 reference statements)

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“…In addition, interest rates are commonly recognized as a monetary tool for shaping forex exchange rates. Accordingly, studies have documented the theoretical and practical channels through which the yield curve may affect the fluctuations in currencies (e.g., Chen and Tsang 2013 ; Jotikasthira et al 2015 ; Baek and Lee 2020 ).…”

Section: Introductionmentioning

confidence: 99%

Dynamic spillovers between the term structure of interest rates, bitcoin, and safe-haven currencies

Aharon

Umar

2021

Financ Innov

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This study examines the connectedness between the US yield curve components (i.e., level, slope, and curvature), exchange rates, and the historical volatility of the exchange rates of the main safe-haven fiat currencies (Canada, Switzerland, EURO, Japan, and the UK) and the leading cryptocurrency, the Bitcoin. Results of the static analysis show that the level and slope of the yield curve are net transmitters of shocks to both the exchange rate and its volatility. The exchange rate of the Euro and the volatility of the Euro and the Canadian dollar exchange rate are net transmitters of shocks. Meanwhile, the curvature of the yield curve and the Japanese Yen, Swiss Franc, and British Pound act mainly as net receivers. Our static connectedness analysis shows that Bitcoin is mainly independent of shocks from the yield curve’s level, slope, and curvature, and from any main currency investigated. These findings hint that Bitcoin might provide hedging benefits. However, similar to the static analysis, our dynamic analysis shows that during different periods and particularly in stressful times, Bitcoin is far from being isolated from other currencies or the yield curve components. The dynamic analysis allows us to observe Bitcoin’s connectedness in times of stress. Evidence supporting this contention is the substantially increased connectedness due to policy shocks, political uncertainty, and systemic crisis, implying no empirical support for Bitcoin’s safe-haven property during stress times. The increased connectedness in the dynamic analysis compared with the static approach implies that in normal times and especially in stressful times, Bitcoin has the property of a diversifier. The results may have important implications for investors and policymakers regarding their risk monitoring and their assets allocation and investment strategies.

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Section: Introductionmentioning

confidence: 99%