Downside Market Risk of Carry Trades

Review of Finance, Vol. 18, No. 5, 2014.

52 Pages Posted: 25 Nov 2012 Last revised: 11 Nov 2014

Date Written: March 15, 2010


I propose a new factor – the global downside market factor – to explain high returns to carry trades. I show that carry trades have high downside market risk, i.e. they crash systematically in the worst states of the world when the global stock market plunges or when a disaster occurs. The downside market factor explains the returns to currency portfolios sorted by the forward discount better than other factors previously proposed in the literature. GMM estimates of the downside beta premium are similar in the currency and stock markets, statistically significant and close to their theoretical value. High returns to carry trades are fair compensation for their high downside market risk.

Keywords: carry trades, currency risk, downside risk, downside beta, disaster risk

JEL Classification: G12, G15, F31

Suggested Citation

Dobrynskaya, Victoria, Downside Market Risk of Carry Trades (March 15, 2010). Review of Finance, Vol. 18, No. 5, 2014. , Available at SSRN: or

Victoria Dobrynskaya (Contact Author)

School of Finance, HSE University ( email )

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