Volatility carry predicts volatility risk premia across equities, currencies, fixed income, and commodities. Diversified carry and timing strategies deliver strong performance, with volatility swaps proving most resilient to trading costs.
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Abstract
This article examines whether volatility carry predicts volatility risk premia across global asset classes. Using forward volatility agreements and volatility swaps, we construct cross-sectional strategies that buy high-carry assets and short low-carry assets across equities, currencies, fixed income, and commodities. These strategies generate positive excess returns and strong Sharpe ratios, especially in diversified multi-asset portfolios. Timing strategies based on volatility carry also produce significant alpha. After allowing for transaction costs, the most robust results are obtained for volatility swap strategies; forward volatility agreement strategies are more affected by trading frictions. The evidence suggests that volatility carry is a useful signal for systematic volatility investing, but its practical value depends on the instrument used and on implementation costs.