Do Peso Problems Explain the Returns to the Carry Trade?

Craig Burnside, Martin Eichenbaum, Isaac Kleshchelski and Sergio Rebelo ()

No 14054, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs which are on average large and uncorrelated with traditional risk factors. We argue that these payoffs reflect a peso problem. The underlying peso event features high values of the stochastic discount factor rather than very large negative payoffs.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2008-06
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Published as Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011. "Do Peso Problems Explain the Returns to the Carry Trade?," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 853-891.

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Related works:
Journal Article: Do Peso Problems Explain the Returns to the Carry Trade? (2011)
Working Paper: Do Peso Problems Explain the Returns to the Carry Trade? (2010)
Working Paper: Do Peso Problems Explain the Returns to the Carry Trade? (2008)
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