67 Pages Posted: 19 Jul 2015 Last revised: 1 Nov 2016
Date Written: November 1, 2016
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, Predictability, Stocks, Bonds, Currencies, Commodities, Corporate Bonds, Options, Global Recessions, Liquidity Risk, Volatility Risk
Suggested Citation: Suggested Citation
Koijen, Ralph S. J. and Moskowitz, Tobias J. and Pedersen, Lasse Heje and Vrugt, Evert B., Carry (November 1, 2016). Chicago Booth Research Paper No. 15-20. Available at SSRN: https://ssrn.com/abstract=2632697 or http://dx.doi.org/10.2139/ssrn.2632697