A crisis-robust carry trade strategy developed using the VIX

This thesis tested whether a carry trade strategy can be made crisis-robust using the VIX. The crisis-robust carry trade strategy uses three in-sample estimated crisis definitions to determine an out-of-sample crisis period. During the estimated crisis periods this thesis tested four different alternative strategies including a PPP-based strategy and a momentum strategy. Furthermore, this thesis developed equally-weighted portfolios without filters, equally-weighted portfolio including filters and IRD/ΔPPP/momentum-weighted portfolios, which consisted of 21 major currency pairs. The performance of in total 36 developed crisis-robust carry trade strategies are examined in this thesis. The crisis-robust portfolios generally outperformed the carry trade strategy, the PPP-based strategy and a naïve 50/50 combination of the carry trade strategy and the PPP-based strategy based on risk-adjusted performance measures. This thesis concluded that an equally-weighted CT-PPP portfolio including filters using the ΔVIX crisis definition meets the traits of a crisis-robust carry trade strategy. A Mean-Variance analysis showed that the CT-PPP portfolio including filters using the ΔVIX crisis definition is expected to be economically significant for an investor.