When Carry Goes Bad: The Magnitude, Causes, and Duration of Currency Carry Unwinds

54 Pages Posted: 12 Jan 2017  

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Duncan D. Shand

BlackRock, Inc

Date Written: November 2016

Abstract

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

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

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Duncan D. Shand

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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