Carry On

22 Pages Posted: 25 May 2018

See all articles by Megan Czasonis

Megan Czasonis

State Street Corporate

Baykan Pamir

State Street Associates

David Turkington

State Street Associates

Date Written: May 11, 2018


The carry trade in foreign currencies is known for delivering positive returns on average, and for occasionally suffering large losses. While these characteristics prevail on average across time and across currency pairs, we find that interest rate differentials on their own are not sufficient to identify conditions in which currencies exhibit these return and risk attributes reliably. We use three variables – valuation, volatility and crowding – to identify time periods and cross-sections of currencies in which the carry trade performs best. We document a substantial difference in performance between the carry trade applied to high-volatility versus low-volatility currency pairs. In the full sample from 1984 to 2017, carry in high-volatility pairs has consisted of currencies which are undervalued on average, experience greater swings in valuation, and have boom and bust cycles aligned with investor crowding. This finding is consistent with the notion that carry represents a risk premium. Carry in low-volatility pairs has the opposite characteristics. Though both strategies performed well prior to the 2008 financial crisis, only carry in high-volatility pairs has worked since.

Keywords: Carry Trade, Currencies, Centrality, Crowded Trades, Forward Premium, Valuations, Turbulence

JEL Classification: C60, C61, F31, G10, G11, G15

Suggested Citation

Czasonis, Megan and Pamir, Baykan and Turkington, David, Carry On (May 11, 2018). Available at SSRN: or

Megan Czasonis

State Street Corporate ( email )

1 Lincoln Street
Boston, MA 02111
United States

Baykan Pamir (Contact Author)

State Street Associates ( email )

140 Mt. Auburn St.
Cambridge, MA 02138
United States

David Turkington

State Street Associates ( email )

United States

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