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On the risk and return of the carry trade


Ackermann, Fabian; Pohl, Walter; Schmedders, Karl (2012). On the risk and return of the carry trade. Swiss Finance Institute Research Paper 12-36, University of Zurich.

Abstract

The traditional carry trade has historically been highly profitable, but suffered from crash risk, the proverbial "up by the stairs and down by the elevator.'' This crash risk was realized in dramatic fashion in the wake of the Lehman bankruptcy, when an investor who was long the Australian dollar and short the yen would have lost 22% in October of 2008.In sharp contrast, a dynamic diversified portfolio constructed using mean-variance analysis performs well, even during the crash. A portfolio constructed using mean-variance analysis can identify opportunities that a more heuristic method will not detect. Once sufficiently diversified, the carry trade turns out to have been a surprisingly low-risk strategy over the last 20 years.

Abstract

The traditional carry trade has historically been highly profitable, but suffered from crash risk, the proverbial "up by the stairs and down by the elevator.'' This crash risk was realized in dramatic fashion in the wake of the Lehman bankruptcy, when an investor who was long the Australian dollar and short the yen would have lost 22% in October of 2008.In sharp contrast, a dynamic diversified portfolio constructed using mean-variance analysis performs well, even during the crash. A portfolio constructed using mean-variance analysis can identify opportunities that a more heuristic method will not detect. Once sufficiently diversified, the carry trade turns out to have been a surprisingly low-risk strategy over the last 20 years.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
JEL Classification:F31, F37, G11, G12
Language:English
Date:2012
Deposited On:28 Jan 2013 14:13
Last Modified:05 Apr 2016 16:25
Series Name:Swiss Finance Institute Research Paper
Number of Pages:19
Official URL:http://ssrn.com/abstract=2184336
Other Identification Number:merlin-id:7714

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