Finance Papers

Document Type

Journal Article

Date of this Version

9-2014

Publication Source

Journal of Financial Economics

Volume

113

Issue

3

Start Page

325

Last Page

347

DOI

10.1016/j.jfineco.2014.05.004

Abstract

Currency carry trades exploiting violations of uncovered interest rate parity in G10 currencies deliver significant excess returns with annualized Sharpe ratios equal to or greater than those of equity market factors (1990–2012). Using data on out-of-the-money foreign exchange options, I compute returns to crash-hedged portfolios and demonstrate that the high returns to carry trades are not due to peso problems. A comparison of the returns to hedged and unhedged trades indicates crash risk premia account for at most one-third of the excess return to currency carry trades.

Copyright/Permission Statement

© 2014. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.

Comments

At the time of publication, author [AUTHOR NAME] was affiliated with [INSTITUTION NAME]. Currently, (s)he is a faculty member at the [SCHOOL/DEPT NAME] at the University of Pennsylvania.

Embargo Date

9-2018

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Date Posted: 27 November 2017

This document has been peer reviewed.