Dollar Carry Timing
72 Pages Posted: 3 Dec 2020 Last revised: 10 Mar 2021
There are 2 versions of this paper
Dollar Carry Timing
Date Written: March 9, 2021
Abstract
Dollar carry trade risk premiums - unlike dollar-neutral or foreign exchange carry risk premiums - are positively correlated with firm-level dispersions in investment, profitability, and book-to-market in addition to the Treasury-bill rate, long term bond yield, term spread, and default spread. This predictability is also statistically and economically significant out of sample: It generates Sharpe ratios as large as 1.37 (compared to 0.44 unconditionally), for example. Indeed, several forecasting models pin down the few periods responsible for the entire premium. Finally, any detailed narrative (typically based on untestable claims) in which the variables above are proxies for the latent (quantity of) risk and price of risk states - and the business cycle - in the U.S. explains the results in the present paper. However, I avoid making this type of less scientific claims as much as possible and focus on the evidence, instead.
Keywords: Carry trade, risk premium, business cycle, microeconomic dispersion, foreign exchange.
JEL Classification: G11, G12, G15, F31, E32, D25.
Suggested Citation: Suggested Citation