Carry and Time-Series Momentum: A Match Made in Heaven
Journal of Alternative Investments (Forthcoming)
Posted: 10 Nov 2019
Date Written: October 16, 2019
This paper introduces a novel approach to combining time-series momentum and carry trade by conditioning trading signals of time-series momentum on the sign of the basis, a key input for carry trade. We find that this new technique applied to four major asset classes improves the Sharpe ratio of time-series momentum by approximately 0.17 net of fees. The improvement in performance is greater during recessions and, therefore, conditioning time-series momentum signals on the sign of the basis improves performance when it matters the most. Thus, the new approach has practical importance for investors and asset managers who attempt to improve their long-term performance without increasing downside risk during periods of market turbulence.
Keywords: carry, time-series momentum, basis
JEL Classification: G11
Suggested Citation: Suggested Citation