Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios

25 Pages Posted: 10 Nov 2018

Date Written: October 18, 2018

Abstract

Investors are increasingly showing interest in risk premia strategies across asset classes. Carry is one of the most studied premia. To successfully execute a risk premia strategy, it is important to have a detailed understanding of how individual premia returns are affected by macroeconomic conditions. The literature reports that carry strategies are commonly exposed to business cycle, liquidity and volatility risks; however, evidence of direct links has never been clearly established. We build on this research by directly measuring the macroeconomic characteristics of carry factor portfolios, namely real economic growth and inflation exposures. By pairing methodologies commonly used to derive fundamental characteristics of equity portfolios, we are able to identify macro linkages that have not been previously made evident. Our holdings-based and factor-mimicking portfolio analyses provide insights into the behavior of carry strategies across various asset classes. This approach can help investors build better carry portfolios by anticipating the payoff in different economic scenarios.

Keywords: Factor Investing, Alternative Risk Premia, Style Premia, Carry, Macro Fundamentals

JEL Classification: G1, F3

Suggested Citation

Aiolfi, Marco and Tokat-Acikel, Yesim, Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios (October 18, 2018). Available at SSRN: https://ssrn.com/abstract=3269361 or http://dx.doi.org/10.2139/ssrn.3269361

Marco Aiolfi (Contact Author)

QMA ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

Yesim Tokat-Acikel

QMA ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

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