Good Carry, Bad Carry
We distinguish between ”good” and ”bad” carry trades constructed from G-10 currencies. The good trades exhibit higher Sharpe ratios and sometimes positive return skewness, in contrast to the bad trades that have both substantially lower Sharpe ratios and highly negative return skewness. Surprisingly, good trades do not involve the most typical carry currencies like the Australian dollar and Japanese yen. The distinction between good and bad carry trades significantly alters our understanding of currency carry trade returns, and invalidates, for example, explanations invoking return skewness and crash risk.
We acknowledge many fruitful suggestions by Raymond Kan and discussions with Gurdip Bakshi, Utpal Bhattacharya, Steve Riddiough, Giorgio Valente and Jialin Yu, who also helped us obtain some of the data used in the paper. Participants at the 2016 Annual Conference in International Finance at City University of Hong Kong, the Bank of England, Banca d’Italia and ECB 6-thWorkshop on Financial Determinants of Foreign Exchange Rates, and seminars at Nanyang Technology University, UNSW, SAIF and Xiamen University provided helpful insights. Any remaining errors are our responsibility alone. Panayotov acknowledges support from a Hong Kong RGC Research grant (No. 16505715). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Geert Bekaert & George Panayotov, 2020. "Good Carry, Bad Carry," Journal of Financial and Quantitative Analysis, vol 55(4), pages 1063-1094. citation courtesy of