Carry

Ralph S.J. Koijen, Tobias J. Moskowitz, Lasse Heje Pedersen, Evert B. Vrugt

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security's expected return is decomposed into its “carry,” an ex-ante and model-free characteristic, and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and it captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, in which carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explains carry's premium.

LanguageEnglish
Pages197-225
Number of pages29
JournalJournal of Financial Economics
Volume127
Issue number2
DOIs
Publication statusPublished - 1 Feb 2018

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Assets
Predictors
Expectations hypothesis
Return predictability
Uncovered interest parity
Risk premia
Liquidity risk
Expected returns
Commodities
Credit
Currency market
Volatility risk
Premium
Global recession
Equity

Keywords

  • Bonds
  • Carry trade
  • Commodities
  • Corporate Bonds
  • Currencies
  • Liquidity risk
  • Options
  • Predictability
  • Stocks
  • Volatility risk

Cite this

Koijen, R. S. J., Moskowitz, T. J., Pedersen, L. H., & Vrugt, E. B. (2018). Carry. Journal of Financial Economics, 127(2), 197-225. https://doi.org/10.1016/j.jfineco.2017.11.002
Koijen, Ralph S.J. ; Moskowitz, Tobias J. ; Pedersen, Lasse Heje ; Vrugt, Evert B. / Carry. In: Journal of Financial Economics. 2018 ; Vol. 127, No. 2. pp. 197-225.
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Koijen, RSJ, Moskowitz, TJ, Pedersen, LH & Vrugt, EB 2018, 'Carry', Journal of Financial Economics, vol. 127, no. 2, pp. 197-225. https://doi.org/10.1016/j.jfineco.2017.11.002

Carry. / Koijen, Ralph S.J.; Moskowitz, Tobias J.; Pedersen, Lasse Heje; Vrugt, Evert B.

In: Journal of Financial Economics, Vol. 127, No. 2, 01.02.2018, p. 197-225.

Research output: Contribution to JournalArticleAcademicpeer-review

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Koijen RSJ, Moskowitz TJ, Pedersen LH, Vrugt EB. Carry. Journal of Financial Economics. 2018 Feb 1;127(2):197-225. https://doi.org/10.1016/j.jfineco.2017.11.002