Carry is the return earned by holding an asset that pays a higher yield than the cost of financing it, assuming prices remain unchanged. Carry signals rank assets by their carry (yield differential) and go long the highest-yielding while shorting the lowest-yielding.
Carry across asset classes
- FX carry — long high-interest-rate currencies, short low-rate currencies. The classic currency carry trade exploits the empirical violation of uncovered interest parity.
- Fixed income carry — holding bonds at a steeper part of the yield curve, or longer-duration positions when the curve is upward-sloping.
- Commodity carry — the roll yield in futures markets: the return from a futures position rolling down the forward curve when the market is in backwardation.
- Equity carry — dividend yield or earnings yield as a proxy for the expected return premium above the risk-free rate.
Koijen, Moskowitz, Pedersen, and Vrugt (2018) documented that carry predicts returns across all major asset classes using a unified framework. Carry strategies are exposed to sudden crash risk (carry unwind events) when funding conditions tighten and risk appetite falls — an asymmetry captured by risk-on/risk-off dynamics.