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Carry

Subject

Finance

Publishing details

Working Paper

Authors / Editors

Koijen R;Moskowitz T;Pedersen L;Vrugt E

Publication Year

2015

Abstract

Any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the cross section and time series for a variety of different asset classes including global equities, global bonds, commodities, US Treasuries, credit, and options. This predictability rejects a generalized version of the uncovered interest rate parity and expectations hypothesis in favor of models with varying risk premia. Our global carry factor across markets delivers strong average returns and, while it is exposed to recession, liquidity, and volatility risks, its performance presents a challenge to asset pricing models.

Keywords

Bonds; Carry trade; Commodities; Corporate bonds; Currencies; Global recessions; Liquidity risk, Options, Predictability stocks, Volatility risk

Publication Research Centre

Institute of Finance and Accounting

Series

Working Paper

Available on ECCH

No

View document


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