When Carry Goes Bad: The Magnitude, Causes, and Duration of Currency Carry Unwinds

Michael Melvin and Duncan Shand

No 6210, CESifo Working Paper Series from CESifo

Abstract: We analyze the worst currency carry loss episodes in recent decades, including causes, attribution by currency, timing, and the duration of carry drawdowns. To explore the determinants of the length of carry losses, a model of carry drawdown duration is estimated. We find evidence that drawdown duration varies systematically with expected return from the carry trade at the onset of the drawdown, financial stress indicators and the magnitude of deviations from a fundamental value portfolio of the carry-related portfolio holdings. In an out-of-sample test, we show that these determinants can be used to control carry-related losses and improve investment performance.

Keywords: carry trade; financial risk; duration; active portfolio management (search for similar items in EconPapers)
JEL-codes: E44 F31 G15 (search for similar items in EconPapers)
Date: 2016
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Journal Article: When Carry Goes Bad: The Magnitude, Causes, and Duration of Currency Carry Unwinds (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6210

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