Diversification effect of standard and optimized carry trades

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Reference

Reichenecker, J. A. (2017). Diversification effect of standard and optimized carry trades. European Journal of Finance, 25(8), 34. (ABDC_2016: B; ABDC_2019: A; ABS_2018: 3; ISI_2016: 0.795; ISI_2016_5year: 1.136; VHB_3: B)

Publication type

Article in Scientific Journal

Abstract

Standard carry trades, which consist of purchasing high- and selling low-yield currencies, provide an economic diversification effect. However, the diversification effect is not robust, and is not borne out by much statistical evidence. We introduce optimized carry trades, which incorporate risk components such as currency volatility or currency skewness in the selection process. These optimized carry trades provide a robust economic diversification effect observed by a larger Sharpe ratio, a reduced portfolio volatility, a smaller drawdown, or a reduced tail risk with respect to a benchmark portfolio. Moreover, a significant improvement of the mean-efficient frontier is observable, with the result that minimum-variance and tangency portfolio are enhanced. The empirical results reveal that optimized carry trades have a larger diversification effect than standard carry trades and their modifications.

Research

Enhanced Carry Trades - A new Approach in Asset Management and Trading
PhD-Thesis, February 2014 until February 2018 (finished)

Standard carry trades sell low-yield currencies and buy high-yield currencies. The trading idea is to capture the interest rate differential between currencies. The unique selection criterion of ... more ...

Persons

Organizational Units

  • Chair in Business Administration, Banking and Financial Management
  • Institute for Finance

Original Source URL

Link

DOI

http://dx.doi.org/10.1080/1351847X.2018.1539023