6
The Fundamental Nature of the Carry Regime
IN THIS CHAPTER WE EXPLAIN SEVERAL IDEAS THAT ARE critical to understanding the full depth of carry’s impact on global markets. First, we describe why some level of carry trading is both to be expected and to be desired. Carry traders provide liquidity and leverage to markets and are compensated for this service as well as for bearing the risk of carry crashes. We then explain why the epicenter of this activity is the US markets, particularly volatility trading in the S&P 500. We discuss how this has made S&P 500 volatility, as proxied by the VIX, the central risk factor in global markets. The chapter concludes by looking at central banks and demonstrating how their market activity has directly contributed ...
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