Carry

Tobias J Moskowitz, Lasse Pedersen, Ralph Koijen and Evert B. Vrugt

No 9771, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Carry trade; Predictability stocks; Bonds; Currencies; Commodities; Corporate bonds; Options; Global recessions; Liquidity risk; Volatility risk (search for similar items in EconPapers)
JEL-codes: E44 F30 F31 G11 G12 G13 G14 G15 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-ifn and nep-mac
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Journal Article: Carry (2018)
Working Paper: Carry (2013)
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