# Carry Factor

> The carry factor buys higher yielding assets and sells lower yielding ones across currencies, bonds, commodities and stocks. Learn how carry is measured.

Source: https://learn.tradelabsai.com/research/carry-factor/  
Track: Research and Backtesting · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Carry Factor", https://learn.tradelabsai.com/research/carry-factor/

Carry is the return an asset earns if its price does not change. A currency with a high interest rate, a bond with a high yield and roll down, a commodity in backwardation and a stock index with a high dividend yield all have positive carry. The carry factor systematically buys high carry assets and sells low carry assets across a market. Research has found carry premiums in almost every major asset class, along with a shared vulnerability to sharp losses in crises. The trading strategy view is covered in [Carry Trading](https://learn.tradelabsai.com/strategies/carry-trading/); this lesson treats carry as a systematic factor.

## Measuring carry by asset class

| Asset class | Carry measure | Lesson |
|---|---|---|
| Currencies | Interest rate differential (forward discount) | [Carry Trades in Forex](https://learn.tradelabsai.com/forex/carry-trades-in-forex/) |
| Government bonds | Yield minus funding rate, plus roll down along the curve | [Yield Curve Trades: Steepeners, Flatteners and Butterflies](https://learn.tradelabsai.com/bonds-credit/yield-curve-trades/) |
| Commodities | Roll yield from the futures curve (backwardation positive) | [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/) |
| Equity indices | Dividend yield minus funding rate (from futures pricing) | |
| Credit | Spread minus expected losses | [Credit Spreads](https://learn.tradelabsai.com/bonds-credit/credit-spreads/) |
| Options | Selling implied volatility above expected realised | [Theta Harvesting](https://learn.tradelabsai.com/options/theta-harvesting/) |

Koijen, Moskowitz, Pedersen and Vrugt (2018) defined carry consistently across assets as the expected return from futures converging to spot if prices stay the same.

```
carry ≈ (spot price - futures price) / futures price, scaled to an annual rate
```

## The evidence

- **Currency carry** has earned positive average returns for decades, as documented by many studies, despite theory suggesting it should not (the forward premium puzzle). See [Covered and Uncovered Interest Parity](https://learn.tradelabsai.com/forex/interest-rate-parity/).
- **Koijen et al. (2018)** found carry strategies earned positive returns in equities, bonds, commodities, currencies, credit and options, and that a diversified global carry portfolio had a Sharpe ratio around 1 historically.

## Constructing a carry factor

**Example: A currency carry portfolio**
Each month, rank 10 developed market currencies by their one month interest rate against the US dollar. Buy the 3 highest yielders and sell the 3 lowest yielders, equal weighted. In a period where Australian, New Zealand and Norwegian rates are highest and Japanese, Swiss and euro rates lowest, the portfolio is long AUD, NZD and NOK and short JPY, CHF and EUR. It earns the rate differential each month, plus or minus currency moves. See [Currency Pairs: Majors, Minors and Exotics](https://learn.tradelabsai.com/forex/currency-pairs/).

## Why might carry work?

| Explanation | Idea |
|---|---|
| Crash risk premium | Carry assets tend to fall together in crises; investors are paid for bearing that risk |
| Hedging demand | Hedgers pay to offload risk, as in commodity futures (normal backwardation) |
| Slow moving capital | Arbitrage capital is limited |

## Crash risk

Carry strategies show negative skewness: steady gains with occasional sharp losses during market stress, such as October 2008, when high yielding currencies collapsed against the yen, or August 2024. Losses across asset classes can happen at the same time, reducing the benefit of diversification. See [Skewness and Kurtosis](https://learn.tradelabsai.com/math/skewness-and-kurtosis/) and [Fat Tails](https://learn.tradelabsai.com/math/fat-tails/).

## Managing carry risk

1. **Diversify across asset classes,** which reduces but does not remove crash correlation.
2. **Combine with momentum or trend:** trend filters can reduce exposure when carry trades unwind. See [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/).
3. **Scale by volatility** and reduce exposure when volatility spikes.
4. **Combine with value:** expensive high yielders may be riskier.

## Carry and other factors

Carry often combines well with momentum and value. Momentum helps exit carry trades when they start to unwind, and value helps avoid high yielders whose prices are already stretched. A blend of the three has historically been smoother than carry alone. See [Combining Signals](https://learn.tradelabsai.com/research/combining-signals/).

## Frequently asked questions

### What is the carry factor?

A systematic strategy that buys higher yielding or higher carry assets and sells lower yielding ones, earning the yield difference if prices stay stable.

### Does carry work outside currencies?

Research has found carry premiums in bonds, commodities, equity indices, credit and options as well as currencies.

### What is the main risk of carry?

Sudden crashes during market stress, when carry positions across many assets tend to lose money together.

Next, learn about the premium for illiquidity in [Liquidity Factor](https://learn.tradelabsai.com/research/liquidity-factor/).

## Continue learning

- Next lesson: [Liquidity Factor](https://learn.tradelabsai.com/research/liquidity-factor/)
- Previous lesson: [Low Volatility and Defensive Factors](https://learn.tradelabsai.com/research/low-volatility-factor/)
- Related: [Low Volatility and Defensive Factors](https://learn.tradelabsai.com/research/low-volatility-factor/): The low volatility anomaly is the finding that less volatile stocks have delivered better risk adjusted returns. Learn the evidence, explanations and its risks.
- Related: [Carry Trading](https://learn.tradelabsai.com/strategies/carry-trading/): Carry trading holds higher yielding assets funded by lower yielding ones to earn the difference. Learn how carry works across markets and why carry trades crash.
- Related: [Carry Trades in Forex](https://learn.tradelabsai.com/forex/carry-trades-in-forex/): A forex carry trade buys a high yielding currency funded by a low yielding one. Learn how it earns, famous unwinds, funding currencies and how to manage crash risk.
- Related: [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/): Roll yield is the return from futures converging toward spot as they near expiry. Learn how contango and backwardation drive it and how to estimate it.
- Related: [Yield Curve Trades: Steepeners, Flatteners and Butterflies](https://learn.tradelabsai.com/bonds-credit/yield-curve-trades/): Yield curve trades bet on changes in the curve's shape rather than its level. Learn steepeners, flatteners and butterflies, DV01 weighting, carry and roll down.
- Related: [Factor Investing Explained](https://learn.tradelabsai.com/research/factor-investing-explained/): Factor investing targets traits linked to long run returns, such as value, momentum and quality. Learn the main factors, the evidence and how they are traded.