Working Paper: CEPR ID: DP9771
Authors: Carry Ralph Koijen; Tobias J. Moskowitz; Lasse Heje Pedersen; Evert B. Vrugt
Abstract: 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.
Keywords: bonds; carry trade; commodities; corporate bonds; currencies; global recessions; liquidity risk; options; predictability; stocks; volatility risk
JEL Codes: E44; F30; F31; G11; G12; G13; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carry (Y60) | future returns (G17) |
| carry trade strategy (G15) | significant returns (I26) |
| carry (Y60) | positive price changes (E30) |
| carry (Y60) | expected returns (G17) |
| macroeconomic risks (E66) | expected returns (G17) |
| limited arbitrage (G19) | expected returns (G17) |
| liquidity risks (G33) | expected returns (G17) |
| global recessions (F44) | carry strategies losses (G33) |