This paper shows that currency carry trades can be rationalized by the time-varying risk premia originating from the sovereign solvency risk. We find that solvency risk is a key determinant of risk premia in the cross section of carry trade returns, as its covariance with returns captures a...

This study investigates carry trade diversification opportunities and linkages of major carry trade currencies on five different investment horizons. Using daily data on eight currencies and LIBOR rates, we examine the temporal structure of correlations and assess portfolio diversification...

This paper explores the risk profile of individual currency carry trades. Findings indicate that carry trade profitability depends on a country's political risk, supporting the risk-based view on forward bias. Political risk effect originates as a component of government actions and is more...