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Risk-adjusted return managed carry trade

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  • Dupuy, Philippe

Abstract

We propose a simple dynamic currency carry trade strategy. Implementation of this strategy requires only two indicators: the aggregate forward discount and historic, global foreign exchange volatility. We find that our dynamic strategy delivers a significantly higher Sharpe ratio and greater skewness than a benchmark carry trade strategy. Our results are robust to the time period and currency choices. Both indicators contribute to predictability, and the improvement in performance is visible in both good and bad times. Standard risk factor models are unable to fully explain the returns of this augmented carry trade.

Suggested Citation

  • Dupuy, Philippe, 2021. "Risk-adjusted return managed carry trade," Journal of Banking & Finance, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:jbfina:v:129:y:2021:i:c:s037842662100131x
    DOI: 10.1016/j.jbankfin.2021.106172
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    1. Hertrich, Daniel, 2023. "Carry and conditional value at risk trend: Capturing the short-, intermediate-, and long-term trends of left-tail risk forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Exchange rate; Carry trade; Portfolio; Risk premium;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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