The tail risk premia of the carry trades
Philippe Dupuy – Grenoble Ecole de Management

It may be different from the abstract, say less technical : We study the return to the carry trade and look for factors justifying it (asset pricing framework). We show that the return to the carry trade might be a compensation for extreme risks. Extreme risks might be understood as the interaction of the moments of the distribution of returns (volatility, skewness and kurtosis). We show that the interaction of moments rather than the moments alone seems to drive investor behavior. This makes sense since funding limits are defined on the back of extreme risks measures (VaR) and not on the moments alone. The result holds whether the indicators are estimated in the currency, the equity or the bond market.

Philippe Dupuy

Philippe Dupuy is Associate Professor at Grenoble Ecole de Management since 2009 where he teaches Asset management and International Finance at the Msc and MBA level. He is also responsible for the AMF exam of the school. His research covers foreign exchanges, portfolio construction and the impact of the regulation on field managers. Previously, Philippe worked in the financial industry as quantitative analyst and portfolio manager. He holds a PhD from Dauphine University.


“The carry trade which consists in buying high yielding currencies and selling low yielding ones is usually described by the traders as going up the stairs and coming down the elevator: extreme risks look central to our understanding of the strategy. In this paper we show that VaR based risk management and regulations might justify this phenomenon.”

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