2. Rule Based Carry and Momentum Investment
Rule Based Carry Investment
This chapter is about the effectiveness of applying simple rules to the carry investment. The carry trade will be defined, a “benchmark” established, and finally rule based carry strategies will be discussed to improve returns and reduce risk.
A carry trade broadly means receiving returns from holding (going long) one asset against borrowing (shorting) another asset. For interest rates, this involves borrowing at low rates such as the overnight rate and lending or receiving long-term rates such as 30-year rates, assuming an upward sloping yield curve. This is known as positive carry because the net position is profitable to hold. The inverse position of receiving short-term ...
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