Carry Trade Returns and Segmented Risk Pricing

24 Pages Posted: 23 Feb 2018 Last revised: 12 Jul 2019

See all articles by Gordon Schulze

Gordon Schulze

Otto-von-Guericke-Universität Magdeburg

Date Written: July 10, 2019


The returns to carry trades are controversially discussed as there seems to be no unifying risk-based explanation of currency returns and stock returns. This paper addresses carry trade returns from a risk pricing perspective and examines if these returns can be connected to persistent cross-country differences of risk aversion. Therefore, I analyze a data set of individual carry trade currencies. Based on a GMM estimation, I find significantly large and persistent cross-country differences of risk aversion in the interest rate market compared to the implied risk aversion in the stock market. In this context, investment currencies are more sensitive to U.S. consumption risk while funding currencies provide a hedge. However, this also implies that there is no unifying SDF and consequently, both the interest rate market and the stock market appear to be segmented in risk pricing for carry trade countries.

Keywords: currency returns, foreign exchange, forward premium puzzle, risk aversion, stochastic discount factor

JEL Classification: E21, F31, G12

Suggested Citation

Schulze, Gordon, Carry Trade Returns and Segmented Risk Pricing (July 10, 2019). Available at SSRN: or

Gordon Schulze (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106

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