Standard and optimized carry trades

31 Pages Posted: 2 Nov 2014 Last revised: 21 Nov 2017

See all articles by Jurij-Andrei Reichenecker

Jurij-Andrei Reichenecker

Hochschule Liechtenstein - Institute of Financial Services

Date Written: November 20, 2017

Abstract

Drawdown periods of standard carry trades are primarily the result of losses in classic carry trade currencies. These periods coincide with an increased financial stress, such as the recent financial crisis. The introduced optimized carry trades employ a dynamic weighting scheme for currencies, which incorporates general risk components. Optimized carry trades are therefore less exposed to losses under financial stress, and provide an enhanced risk-return profile over the entire and second half of the sample period and during periods of volatile markets. These results find robust statistical evidence. Furthermore, optimized carry trades have a lower correlation with traditional asset classes than standard carry trades. Traditional models of risk are less successful in explaining the returns of optimized carry trades.

Keywords: Carry Trade, Portfolio Optimization, Alternative Asset Class

JEL Classification: G10, G11

Suggested Citation

Reichenecker, Jurij-Andrei, Standard and optimized carry trades (November 20, 2017). Available at SSRN: https://ssrn.com/abstract=2517467 or http://dx.doi.org/10.2139/ssrn.2517467

Jurij-Andrei Reichenecker (Contact Author)

Hochschule Liechtenstein - Institute of Financial Services ( email )

Liechtenstein

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