Carry
High-yield assets outperform low-yield assets across almost every market.
Typical IS Sharpe
0.4 – 0.7
Typical OOS Sharpe
0.3 – 0.6
Capacity
Large-cap
Signal decay
Persistent
Overview
Carry — earning the income embedded in an asset's current yield — is one of the oldest strategies in finance, dating to the covered interest parity literature and FX forward premium puzzles. Koijen, Moskowitz, Pedersen, and Vrugt (2018) showed that carry works not just in FX but in equities (dividend yield), fixed income (yield curve slope), commodities (futures roll yield), and credit. In equities, carry corresponds roughly to dividend yield or earnings yield, connecting it to the value literature. The universality of carry across markets and time periods makes it one of the most credible multi-asset risk premia.
Economic Intuition
Carry earns a premium because it embodies compensation for bearing risk that materializes when carry unwinds suddenly — as in the 2008 FX carry crash or equity dividend cuts during recessions. The carry trade has known crash risk: high-carry assets underperform sharply during liquidity crises when investors flee to safety. This is consistent with a risk-based explanation. Behavioral explanations are also plausible: investors may underweight yield components relative to price appreciation, systematically underpricing yield-rich assets.
Out-of-Sample Evidence
Strong OOS survivalCarry is one of the most robust premia across asset classes, and the theoretical motivation (compensation for crash risk) is well-specified enough to be credible out-of-sample. In equities, dividend yield as a factor has the advantage of being directly observable without accounting adjustments that create look-ahead bias. The main challenge for equity carry strategies is sector concentration: high-dividend-yield portfolios tend to overweight utilities and financials, creating unintended sector bets.
Key Papers
Foundational research on this factor — start here.
Koijen, R. S. J., Moskowitz, T. J., Pedersen, L. H., & Vrugt, E. B.
2018
Journal of Financial Economics
Asness, C., Moskowitz, T. J., & Pedersen, L. H.
2013
Journal of Finance
Further Reading
Common Risk Factors in Currency Markets
Lustig, H., Roussanov, N., & Verdelhan, A.
2011
Review of Financial Studies