Concealed Carry

75 Pages Posted: 10 Feb 2021 Last revised: 10 Aug 2021

See all articles by Spencer Andrews

Spencer Andrews

University of North Carolina (UNC) at Chapel Hill - Finance Area

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Federico Gavazzoni

INSEAD

Date Written: December 5, 2020

Abstract

The slope carry consists of taking a long (short) position in the long-term bonds of countries with steeper (flatter) yield curves. The traditional carry is a long (short) position in countries with high (low) short-term rates. We document that: (i) the slope carry risk premium is slightly negative (strongly positive) in the pre (post) 2008 period, whereas it is concealed over longer samples; (ii) the traditional carry risk premium is lower post-2008; and (iii) there has been a sharp decline in expected global growth and global inflation post-2008. We connect these empirical findings through an equilibrium model in which investors price news shocks, financial markets are complete, and countries feature heterogeneous exposure to news shocks about both global output expected growth and global inflation.

Keywords: Currency Risk, Carry Trade, Inflation Risk

JEL Classification: F31, G12

Suggested Citation

Andrews, Spencer and Colacito, Riccardo and Croce, Mariano Massimiliano and Gavazzoni, Federico, Concealed Carry (December 5, 2020). Available at SSRN: https://ssrn.com/abstract=3743205 or http://dx.doi.org/10.2139/ssrn.3743205

Spencer Andrews

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
3026502645 (Phone)

Riccardo Colacito

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mariano Massimiliano Croce

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Federico Gavazzoni (Contact Author)

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://federicogavazzoni.com

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