Who Carries?
Abstract: In representative agent models, consumption growth risk explains currency carry trade returns only when risk aversion is high. Yet, a highly risk-averse agent would not hold a carry trade portfolio. Heterogeneity helps by allowing a risk-tolerant minority of agents to hold carry trade portfolios while a risk-intolerant majority does not. We show that with heterogeneous risk aversion, standard models of international macroeconomics produce carry traders endogenously in economies with domestic bias in aggregate portfolios and low aggregate portfolio returns, as observed in Germany, Japan, and the United States, together holding half of global debt.
Figure: Domestic Currency Bias and Portfolio Returns by Country
Notes. The figure shows domestic currency bias and nominal portfolio returns for 188 countries, estimated annually. Germany, Japan, and the United States are shown in yellow (on hover); all other countries are shown in gray. Portfolio returns are calculated using short-term interest rates, exchange rates, and CPI inflation rates from the OECD and IMF, with portfolio weights estimated from IMF and BIS debt holdings and issuance data. We exclude 2.38% of estimates with negative domestic currency bias and country-year observations with interest or exchange rates more than three standard deviations above the yearly mean.
BibTeX Citation
@article{Ferreira2025CarryTrade,
title={Who Carries?},
author={Alex Ferreira and Giuliano Ferreira and Miguel León-Ledesma and Rory Mullen},
journal={Working Paper},
year={2025}
}