The Carry Trade: Risks and Drawdowns

Kent Daniel, Robert Hodrick () and Zhongjin Lu

No 20433, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine carry trade returns formed from the G10 currencies. Performance attributes depend on the base currency. Dynamically spread-weighting and risk-rebalancing positions improves performance. Equity, bond, FX, volatility, and downside equity risks cannot explain profitability. Dollar-neutral carry trades exhibit insignificant abnormal returns, while the dollar exposure part of the carry trade earns significant abnormal returns with little skewness. Downside equity market betas of our carry trades are not significantly different from unconditional betas. Hedging with options reduces but does not eliminate abnormal returns. Distributions of drawdowns and maximum losses from daily data indicate the importance of time-varying autocorrelation in determining the negative skewness of longer horizon returns.

JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014-08
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Kent Daniel & Robert J. Hodrick & Zhongjin Lu, 2017. "The Carry Trade: Risks and Drawdowns," Critical Finance Review, vol 6(2), pages 211-262.

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Journal Article: The Carry Trade: Risks and Drawdowns (2017)
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