The Carry Trade: Risks and Drawdowns

Kent Daniel, Robert Hodrick () and Zhongjin Lu

Critical Finance Review, 2017, vol. 6, issue 2, 211-262

Abstract: We find important differences in dollar-based and dollar-neutral G10 carry trades. Dollar-neutral trades have positive average returns, are highly negatively skewed, are correlated with risk factors, and exhibit considerable downside risk. In contrast, a diversified dollar-carry portfolio has a higher average excess return, a higher Sharpe ratio, minimal skewness, is unconditionally uncorrelated with standard risk-factors, and exhibits no downside risk. Distributions of drawdowns and maximum losses from daily data indicate a role for timevarying autocorrelation in determining negative skewness at longer horizons.

Keywords: Currency carry trade; Currency risk factors; Market efficiency (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (37)

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Related works:
Working Paper: The Carry Trade: Risks and Drawdowns (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000051

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