The Concept of Carry Applied to Global Equities and Commodities

Mathias Demandt Winther & Magnus Brandt Poulsen

Student thesis: Master thesis


In this thesis, we apply the concept of carry, which has been studied almost exclusively in currency markets to global equity futures and commodity futures. We decompose any security’s return into its carry and its expected price appreciation, where carry is a forwardlooking, model-free measure of return under the assumption of no price changes. Based on carry, we form three long-short portfolios; one portfolio of global equities, one portfolio of commodities and one mixed portfolio of both global equities and commodities. For all of the portfolios, we perform a thorough performance analysis. In particular, we test whether known return predictors can explain carry. For all the portfolios, we find that carry generate abnormal returns above and beyond simple passive exposure to that asset class. Further, for the equity- and the mixed portfolio we find that known return predictors do not explain the excess returns generated by carry. For the commodity portfolio, we find the opposite, where the return predictors value and momentum explain the excess return generated by carry. We further investigate whether risk factors such as global volatility risk, downside risk exposure and recessions can explain the excess returns generated by carry. Overall, we find little explanatory-power of these risk factors, where only downside risk exposure can explain some of the excess returns generated by carry. For the equity portfolio, we find that performance heavily depends on how carry is constructed. Lastly, for equities, we find that a positive carry is associated with a positive expected price appreciation. For commodities, we find that carry does not predict returns.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages122