DP9771 Carry

Author(s): Ralph Koijen, Tobias J Moskowitz, Lasse Heje Pedersen, Evert B. Vrugt
Publication Date: December 2013
Keyword(s): bonds, carry trade, commodities, corporate bonds, currencies, global recessions, liquidity risk, options, predictability stocks, volatility risk
JEL(s): E44, F30, F31, G11, G12, G13, G14, G15
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9771

Any security?s expected return can be decomposed into its ?carry? and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the cross section and time series for a variety of different asset classes including global equities, global bonds, commodities, US Treasuries, credit, and options. This predictability rejects a generalized version of the uncovered interest rate parity and expectations hypothesis in favor of models with varying risk premia. Our global carry factor across markets delivers strong average returns and, while it is exposed to recession, liquidity, and volatility risks, its performance presents a challenge to asset pricing models.