Crash-Neutral Currency Carry Trades
Jakub W. Jurek
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
August 31, 2013
AFA 2010 Atlanta Meetings Paper
Currency carry trades exploiting violations of uncovered interest rate parity in G10 currencies deliver significant excess returns with annualized Sharpe 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.
Number of Pages in PDF File: 51
Keywords: currency carry trade, crash risk, foreign exchange option, forward premium anomaly, uncovered interest parity (UIP)
JEL Classification: F31, G12
Date posted: September 14, 2008 ; Last revised: October 7, 2013
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