39 Pages Posted: 19 Sep 2017
Date Written: September 11, 2017
In this paper I document that carry trades in commodity markets are subject to potential large and infrequent losses, that is, tail risk. Also, I show that shocks to carry trades and volatility have persistent tail-specific effects which last from four to twelve weeks ahead. The main empirical results are consistent with existing theoretical models in which carry traders are subject to limited risk capacity and liquidity constraints. In this respect, I provide evidence that money managers, index traders, and more generally non-commercial traders, tend to unwind their net-long futures positions when exposed to deteriorating aggregate financial conditions and increasing market uncertainty. Methodologically, I make use of panel quantile regressions with non-additive fixed effects, which allow to identify the tail-specific effect of carry on the conditional distribution of commodity futures excess returns.
Keywords: Commodity Markets, Carry, Quantile Regressions, Tail Risk, Financial Markets
JEL Classification: G12, G17, E44, C58
Suggested Citation: Suggested Citation
Bianchi, Daniele, Carry Trades and Tail Risk: Evidence from Commodity Markets (September 11, 2017). Available at SSRN: https://ssrn.com/abstract=3035453