Optimising Cross-Asset Carry

Abstract

The term "carry" has been primarily studied and explored within currency markets where, contrary to the uncovered interest rate parity, borrowing from a low interest rate country and investing in a high interest rate country has historically delivered positive and statistically significant returns. This paper extends the notion of carry to different asset classes by looking at the futures markets of commodities, equity indices and government bonds. We explore the profitability of cross-sectional and time-series variants of the carry strategy within each asset class but most importantly we investigate the benefits of constructing a multi-asset carry strategy after properly accounting for the covariance structure of the entire universe. Multi-asset carry allocations benefit from the low correlation between asset-class specific carry portfolios and do not exhibit significant downside or volatility risk which have been traditionally associated with the FX carry strategy.

Keywords: Carry, Portfolio optimization, Commodities, Risk Budgeting

JEL Classification: E3, G11, G13, G14, G15, F37