Handbook of Exchange Rates

10.6 Conclusion

Carry trades are, on average, profitable. As we have seen, conventional, stock-Market-based models of risk do not explain the returns to the carry trade. Less traditional factors, that are defined in terms of the currency fluctuations, are more successful in explaining currency returns, but do not, conversely, explain the returns to the stock market. This means that, at least for the moment, a unifying explanation of stock market and carry-trade returns based on observed fluctuations in measures of risk remains elusive. An alternative explanation is that carry-trade returns reflect investors' concerns about out-of-sample events. While this story has some appeal, it must, of course, grapple with the evidence that volatility and skewness (or crash risk) factors have explanatory power in sample.