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The Journal of Alternative Investments

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Carry On

Megan Czasonis, Baykan Pamir and David Turkington
The Journal of Alternative Investments Fall 2019, 22 (2) 100-111; DOI: https://doi.org/10.3905/jai.2019.1.079
Megan Czasonis
is a managing director at State Street Associates in Cambridge, MA
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Baykan Pamir
is an assistant vice president at State Street Associates in Cambridge, MA
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David Turkington
is a senior vice president at State Street Associates in Cambridge, MA
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Abstract

The carry trade in foreign currencies is known for delivering positive returns, on average, and for occasionally suffering large losses. While these characteristics prevail, on average, across time and across currency pairs, the authors find that interest rate differentials on their own are not sufficient to identify conditions in which currencies reliably exhibit these return and risk attributes. They use three variables—valuation, crowding, and volatility—to identify time periods and cross-sections of currencies in which the carry trade performs best. They document a substantial difference in performance between the carry trade applied to high-volatility versus low-volatility currency pairs. In the full sample from 1984 to 2017, carry in high-volatility pairs has consisted of currencies that are undervalued, on average, experience greater swings in valuation, and have boom and bust cycles aligned with investor crowding. This finding is consistent with the notion that carry represents a risk premium. Carry in low-volatility pairs has the opposite characteristics. Though both strategies performed well prior to the 2008 financial crisis, only carry in high-volatility pairs has worked since.

TOPICS: Currency, quantitative methods, analysis of individual factors/risk premia

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The Journal of Alternative Investments: 22 (2)
The Journal of Alternative Investments
Vol. 22, Issue 2
Fall 2019
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Carry On
Megan Czasonis, Baykan Pamir, David Turkington
The Journal of Alternative Investments Sep 2019, 22 (2) 100-111; DOI: 10.3905/jai.2019.1.079

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Carry On
Megan Czasonis, Baykan Pamir, David Turkington
The Journal of Alternative Investments Sep 2019, 22 (2) 100-111; DOI: 10.3905/jai.2019.1.079
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  • Article
    • Abstract
    • MEASURING CARRY TRADE PERFORMANCE
    • THE IMPACT OF INTEREST RATE DIFFERENTIALS
    • THE IMPACT OF VALUATIONS
    • THE IMPACT OF INVESTOR CROWDING
    • THE IMPACT OF VOLATILITY
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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