Ralph S. J. Koijen
London Business School - Department of Finance; National Bureau of Economic Research (NBER)
Tobias J. Moskowitz
University of Chicago - Booth School of Business
Lasse Heje Pedersen
New York University (NYU); Copenhagen Business School; AQR Capital Management, LLC; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Evert B. Vrugt
VU University Amsterdam, PGO-IM
November 7, 2013
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 and 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.
Number of Pages in PDF File: 63
Keywords: Carry Trade, Stocks, Bonds, Currencies, Commodities, Corporate Bonds, Options, Global Recessions
JEL Classification: E3, F3, G1working papers series
Date posted: July 26, 2013 ; Last revised: November 8, 2013
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