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Stats › Currencies and commodities › Carry crash risk

Carry trade crash risk scales with the interest differential, with an 81% R squared

NZD, differential +0.9%
-0.297
AUD, +0.6%
-0.322
GBP, +0.5%
-0.094
NOK, +0.5%
-0.019
CAD, +0.2%
-0.143
EUR, -0.1%
0.131
CHF, -0.4%
0.144
JPY, -0.7%
0.318

Average quarterly return skewness against USD, ordered by average quarterly interest differential from highest to lowest. 1986 to 2006. The high-yielders have negative skew, the funding currencies have positive skew, and the relationship across the eight has an R squared of 81%.

Across eight currencies over twenty years, the more a currency pays in carry, the more negatively skewed its returns. The cross-sectional relationship has an R squared of 81%, and diversifying across currencies does not reduce it.

81%Cross-sectional R squared of skewness on the average interest differential
-0.977Quarterly skewness of the three-long three-short carry portfolio
0.784Annualised Sharpe of that portfolio, 1986 to 2006
0.57The same Sharpe after 2008 is included, against 0.88 before

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