Carry

Ralph S.J. Koijen, Tobias Moskowitz, Lasse Heje Pedersen, Evert B. Vrugt

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Abstract

We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security’s expected return is decomposed into its “carry,” an ex-ante and model-free characteristic, and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and it captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, in which carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explains carry’s premium.
OriginalsprogEngelsk
TidsskriftJournal of Financial Economics
Vol/bind127
Udgave nummer2
Sider (fra-til)197-225
Antal sider29
ISSN0304-405X
DOI
StatusUdgivet - feb. 2018

Bibliografisk note

Published online: 21 November 2017

Emneord

  • Carry trade
  • Predictability
  • Stocks
  • Bonds
  • Currencies
  • Commodities
  • Corporate bonds
  • Options
  • Liquidity risk
  • Volatility risk

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