Carry

67 Pages Posted: 26 Jul 2013 Last revised: 1 Nov 2016

Ralph S. J. Koijen

New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Evert B. Vrugt

VU University Amsterdam, PGO-IM

Multiple version iconThere are 4 versions of this paper

Date Written: November 1, 2016

Abstract

We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security’s expected return is decomposed into its “carry” – an ex-ante and model-free characteristic – and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of di erent asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, where carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explain carry’s premium.

Keywords: Carry Trade, Stocks, Bonds, Currencies, Commodities, Corporate Bonds, Options, Global Recessions

JEL Classification: E3, F3, G1

Suggested Citation

Koijen, Ralph S. J. and Moskowitz, Tobias J. and Pedersen, Lasse Heje and Vrugt, Evert B., Carry (November 1, 2016). Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2298565 or http://dx.doi.org/10.2139/ssrn.2298565

Ralph S. J. Koijen (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://www.koijen.net

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Evert B. Vrugt

VU University Amsterdam, PGO-IM ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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