Modified and balanced FX carry

December 31, 2022

Jupyter Notebook

There are two simple ways to enhance FX carry strategies with economic information. The first increases or reduces the carry signal depending on whether relevant economic indicators reinforce or contradict its direction. The output can be called “modified carry”. It is a gentle adjustment that leaves the basic characteristics of the original carry strategy intact. The second method equalizes the influence of carry and economic indicators, thus diversifying over signals with complementary strengths. The combined signal can be called “balanced carry”. An empirical analysis of carry modification and balancing with economic performance indicators for 26 countries since 2000 suggests that both adjustments would have greatly improved the performance of vol-targeted carry strategies. Modified carry would also have improved the performance of hedged FX carry strategies.

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asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation central counterparty clearing China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
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