Working Paper: CEPR ID: DP18670
Authors: Spencer Andrews; Ric Colacito; Mariano Croce; Federico Gavazzoni
Abstract: The slope carry takes a long (short) position in the long-term bonds of countries with steeper (flatter) yield curves. The traditional carry takes a long (short) position in countries with high (low) short-term rates. We document that: (i) the slope carry return is slightly negative (strongly positive) in the pre (post) 2008 period, whereas it is concealed over longer samples; (ii) the traditional carry return is lower post-2008; and (iii) expected global growth and inflation declined post-2008. We connect these findings through an equilibrium model in which countries feature heterogeneous exposure to news shocks about global output and global inflation.
Keywords: Foreign Inflation Risk Premiums
JEL Codes: F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected global inflation (E31) | returns of traditional carry trade (G15) |
| yield curve slope (E43) | carry returns (H00) |
| global growth expectations (F01) | returns of traditional carry trade (G15) |
| slope carry strategy (G40) | positive return post-2008 (G19) |
| changes in global inflation expectations (E31) | higher returns in countries with high exposure to inflation risk (G15) |