54 Pages Posted: 12 Jan 2017
Date Written: November 2016
We analyze the worst currency carry loss episodes in recent decades, including causes, attribution by currency, timing, and the duration of carry drawdowns. To explore the determinants of the length of carry losses, a model of carry drawdown duration is estimated. We find evidence that drawdown duration varies systematically with expected return from the carry trade at the onset of the drawdown, financial stress indicators and the magnitude of deviations from a fundamental value portfolio of the carry-related portfolio holdings. In an out-of-sample test, we show that these determinants can be used to control carry-related losses and improve investment performance.
Keywords: carry trade, financial risk, duration, active portfolio management
JEL Classification: E440, F310, G150
Suggested Citation: Suggested Citation
Melvin, Michael and Shand, Duncan D., When Carry Goes Bad: The Magnitude, Causes, and Duration of Currency Carry Unwinds (November 2016). CESifo Working Paper Series No. 6210. Available at SSRN: https://ssrn.com/abstract=2897482