Crash-neutral currency carry trades

Jakub W. Jurek

Journal of Financial Economics, 2014, vol. 113, issue 3, 325-347

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.

Keywords: Carry trade; Crash risk; Foreign exchange option; Forward premium anomaly; Uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (105)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:113:y:2014:i:3:p:325-347

DOI: 10.1016/j.jfineco.2014.05.004

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