Carry Trade Returns and Segmented Risk Pricing

Abstract The returns to carry trades are controversially discussed. There seems be no unifying risk-based explanation of currency and stock returns, while the countries’ interest rate differential plays a leading part in carry-trade performance. Therefore, this paper addresses from risk-pricing perspective examines if these can connected cross-country differences risk pricing interest-rate market compared market. Data Thomson Reuters Datastream Federal Reserve Economic covering Australia, Japan, New Zealand, Switzerland United States were analyzed based on GMM estimation. results indicate significant persistent aversion implied This may offer opportunities for arbitrage and, therefore, pricing-related returns.