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; AQR Capital; National Bureau of Economic Research (NBER)
Lasse Heje Pedersen
New York University (NYU) - Department of Finance; 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
NBER Working Paper No. w19325
A security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry can be measured in advance without an asset pricing model. We find that carry predicts returns both in the cross section and time series for a variety of different asset classes that include global equities, global bonds, currencies, commodities, US Treasuries, credit, and equity index options. This predictability underlies the strong returns to “carry trades” that go long high-carry and short low-carry securities, applied almost exclusively to currencies, but shown here to be a robust feature of many assets. We decompose carry returns into static and dynamic components and analyze the economic exposures. Despite unconditionally low correlations across asset classes, we find times when carry strategies across all asset classes do poorly, and show that these episodes coincide with global recessions.
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Number of Pages in PDF File: 65
Date posted: August 17, 2013
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