We are grateful to an anonymous referee, Jungwon Suh, John Wald, Michael Williams, and the participants at the Sixth Conference of Asia-Pacific Association of Derivatives in Busan, Korea for valuable comments. Tse acknowledges the financial support from a summer research grant of U.S. Global Investors, Inc. and the College of Business at the University of Texas at San Antonio. *Correspondence author, One UTSA Circle, College of Business, Department of Finance, University of Texas at San Antonio, Texas 78249. Tel: 210-458-5314, Fax: 210-458-2515, e-mail: yiuman.tse@utsa.edu. Received September 2010; Accepted January 2011 ■ Yiuman Tse is a Professor and U.S. Global Investors, Inc. Fellow at the University of Texas at San Antonio, Texas. ■ © 2011 Wiley Periodicals, Inc. DOI: 10.1002/fut.20516 THE RELATIONSHIP BETWEEN CURRENCY CARRY TRADES AND U.S. STOCKS YIUMAN TSE* LIN ZHAO The article examines the relationship between daily returns of currency carry trades and U.S. stocks from January 1995 through September 2010. Carry trade and stock returns are highly correlated with no Granger-causality in either direc- tion. An EGARCH model shows that significant volatility spillovers flow from the stock market to the carry-trade market, but not vice versa. The markets are more correlated in periods of high volatility. Volatilities in both markets also increase more with negative innovations than positive innovations. A sectoral analysis of the index suggests that volatilities of cyclical stocks have more impact than non- INTRODUCTION Currency carry trades have been a popular speculative strategy among both global investment managers and individual currency traders in recent years. cyclical stocks on carry trades. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:252 271, 2012 – The Journal of Futures Markets, Vol. 32, No. 3, 252–271 (2012) Lin Zhao is a doctoral student at the University of Texas at San Antonio, Texas. Published online March 2, 2011 in Wiley Online Library (wileyonlinelibrary.com).