Carry

67 Pages Posted: 19 Jul 2015 Last revised: 1 Nov 2016

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; 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 3 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, Predictability, Stocks, Bonds, Currencies, Commodities, Corporate Bonds, Options, Global Recessions, Liquidity Risk, Volatility Risk

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

Ralph S. J. Koijen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tobias J. Moskowitz (Contact Author)

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 )

London
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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