Essays on Carry Strategies

Walid Khalfallah, PhD
Carry Trade, Carry Spread, Predictability, Risk Premia, Factor Timing, Multi-asset Class, Forward Volatility Agreement, Volatility Swaps, Liquidity Risk, Volatility Risk

Abstract :

Cross-asset Carry, Predictability and Timing: This paper shows the presence of both unconditional and conditional carry premia across various asset classes with the carry factor predictable by the carry spread. Time-variation in carry premia is economically and statistically large with expected returns of cross-asset carry increasing in the carry spread. Pooled regressions also provide evidence of cross-asset market integration. The study shows that the carry spread is useful to time carry in certain asset classes, whereby timing strategies can be an attractive complement to the unconditional carry strategy. Similarly, cross-asset rotation strategies based on relative carry spread are generally economically meaningful, yet they fail to beat unconditional benchmark portfolios on a risk adjusted basis. Overall, the study finds that while carry returns predictability is statistically strong across all asset classes, the economic benefits of timing the carry factor are less consistent.

Volatiity Carry: This paper identifies common risk factors in cross-sectional volatility carry returns across various asset classes. A strategy which takes long and short positions in forward volatility agreements and volatility swaps of assets with respectively high and low volatility carry generate significant excess returns. Panel regressions of volatility returns on volatility carry show consistently positive relationship in each underlying asset class, confirming volatility carry as strong predictor of volatility returns. Timing strategies based on this evidence show positive risk adjusted returns exceeding those generated by carry strategies on underlying markets. While volatility carry returns are related to volatility premia, carry still produces significant positive alpha in each market. Other risk factors proposed in the literature such as underlying asset carry, volatility changes, global liquidity shocks and transaction costs are not able to justify the variation in cross-sectional volatility returns.



Publication date of the thesis

Thesis committee

Supervisor: Nikolaos Tessaromatis, EDHEC Business School 

External reviewer: Pasquale Della Corte, Imperial College London

Other committee members: Emmanuel Jurczenko and Enrique Schroth, EDHEC Business School