Good Carry, Bad Carry

77 Pages Posted: 4 Jan 2019

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

George Panayotov

Hong Kong University of Science & Technology (HKUST)

Multiple version iconThere are 4 versions of this paper

Date Written: August 21, 2018

Abstract

We distinguish between ”good” and ”bad” carry trades constructed from G-10 currencies. The good trades exhibit higher Sharpe ratios and sometimes positive return skewness, in contrast to the bad trades that have both substantially lower Sharpe ratios and highly negative return skewness. Surprisingly, good trades do not involve the most typical carry currencies like the Australian dollar and Japanese yen. The distinction between good and bad carry trades significantly alters our understanding of currency carry trade returns, and invalidates, for example, explanations invoking return skewness and crash risk.

Keywords: currency carry trade, predictability, currency risk factors

JEL Classification: C23, C53, G11

Suggested Citation

Bekaert, Geert and Panayotov, George, Good Carry, Bad Carry (August 21, 2018). Available at SSRN: https://ssrn.com/abstract=3304730 or http://dx.doi.org/10.2139/ssrn.3304730

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

George Panayotov

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong
852-2358-5049 (Phone)
852-2358-1749 (Fax)

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