Monotonic patterns in carry trades

In this paper we research the existence of a monotonic pattern in the average returns of carry trades to shine light on the forward premium puzzle. Average carry trade returns are tested for monotonicity against ordered interest differentials between a domestic country and 9 other countries. Our paper researches this pattern for 4 different domestic countries; the US, Japan, Norway and Switzerland. The hypothesis of an increasing monotonic pattern in the carry trade returns is tested with an MR-test, Bonferroni bound test and by estimating a multivariate model. All results point towards a significant uncovered interest arbitrage pattern in the returns.