Standard and optimized carry trades

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Reference

Reichenecker, J. A. (2018). Standard and optimized carry trades. International Journal of Finance & Economics, 23(3), 329-344.

Publication type

Article in Scientific Journal

Abstract

Drawdown periods of standard carry trades are primarily the result of losses in classic carry trade currencies. These periods coincide with an increased financial stress, such as the recent financial crisis. The introduced optimized carry trades employ a dynamic weighting scheme for currencies, which incorporates general risk components. Optimized carry trades are therefore less exposed to losses under financial stress, and provide an enhanced risk-return profile over the entire and second half of the sample period and during periods of volatile markets. These results find robust statistical evidence. Furthermore, optimized carry trades have a lower correlation with traditional asset classes than standard carry trades. Traditional models of risk are less successful in explaining the returns of optimized carry trades.

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

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

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