Carry Trades: In a Portfolio Context

Malthe Munch Jensen

Student thesis: Diploma thesis


This report provides a performance and risk analysis of both carry trades and equity strategies during the time-period of 2002-2016. The measured time-period is divided into three sub-periods showing different economic circumstances to see how both performance and the relationship between carry trades and equities evolve. This is to explore the possibility of carry trades working as a complement to an equity based portfolio and to determine if it can create diversification during the time of need. The method of analysis includes applying the principles of modern portfolio theory to carry trades and equities, while trying to create efficient portfolios using Markowitz’ efficient frontier. The findings of the analysis show how traditional thoughts of carry trades’ crash risk are put into perspective, as neither equities nor carry trades show a normal distribution. Carry trade portfolios show high Sharpe Ratios but have increasing correlations with equities during the time of crisis, which makes it less desirable for reasons of diversifications. Further results show how the implementation of transaction costs can lead to the added suffering of carry trades during increased financial uncertainty. The traditional saying regarding carry trades “going up by stairs and down by elevators” further gains momentum through the paper’s results of maximum drawdown duration risk and much lower median returns for carry trades than equities.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
Publication date2017
Number of pages88