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Standard and optimized carry trades

Jurij‐Andrei Reichenecker

International Journal of Finance & Economics, 2018, vol. 23, issue 3, 329-344

Abstract: Drawdown periods of standard carry trades are primarily the result of losses in classic carry trade currencies. These periods coincide with an increased financial stress, such as the recent financial crisis. The introduced optimized carry trades employ a dynamic weighting scheme for currencies, which incorporates general risk components. Optimized carry trades are therefore less exposed to losses under financial stress, and provide an enhanced risk‐return profile over the entire and second half of the sample period and during periods of volatile markets. These results find robust statistical evidence. Furthermore, optimized carry trades have a lower correlation with traditional asset classes than standard carry trades. Traditional models of risk are less successful in explaining the returns of optimized carry trades.

Date: 2018
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https://doi.org/10.1002/ijfe.1619

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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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