The Carry Trade: From 1990 to 2020

Abstract

This thesis examines the carry trade movements from 1990 to 2020. The purpose is to evaluate how an actively managed carry trade has behaved during different market conditions. There are two carry portfolios constructed, the first one is an American carry and the second one makes an active decision every month to invest in the largest interest rate differentials. The carry trades are based on nine currencies AUD, CHF, EUR, GBP, JPY, NOK, SEK, USD, and ZAR. The result finds evidence for violation of UIP and that the premium puzzle seems to be in line with findings of previous studies during some periods. During recent years, the study finds that the carry trades are less profitable, although the portfolio Best Carry of All is a viable complement to an investor’s portfolio, due to stable performance even during distressed market conditions.