Lu, HelenJacobsen, Ben2025-02-062025-02-0620160261-560610.1016/j.jimonfin.2016.02.013https://repository.vlerick.com/handle/20.500.12127/7608Equity returns predict the short leg profits of carry trades. Commodity price changes predict the long leg profits. Consistent with gradual information diffusion instead of time-varying risk. One-directional predictability from commodities to stocks and stocks to currencies.Equity returns predict carry trade profits from shorting low interest rate currencies. Commodity price changes predict profits from longing high interest rate currencies. The gradual information diffusion hypothesis (Hong & Stein, 1999) provides a ready explanation for these predictability results. These results cannot be explained by time-varying risk premia as stock returns and commodity price changes significantly predict negative carry trade profits. The predictability is one-directional, from commodities to high interest rate currencies, from commodities to stocks and from stocks to low interest rate currencies.enCarry TradeGradual Information DiffusionReturn PredictabilitySafe-Haven CurrenciesTime-Varying Risk PremiumVector Auto RegressionJournal of Internal Money and Finance1873-0639306732