Abstract

http://ssrn.com/abstract=1397668
 
 

References (39)



 
 

Citations (36)



 


 



Crash Risk in Currency Markets


Emmanuel Farhi


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Samuel P. Fraiberger


Harvard University - Institute for Quantitative Social Sciences; Northeastern University - Network Science Institute; NYU Stern School of Business - IOMS Department

Xavier Gabaix


Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); New York University - Stern School of Business

Romain G. Rancière


Paris School of Economics (PSE); International Monetary Fund (IMF)

Adrien Verdelhan


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

March 12, 2015

NYU Working Paper No. FIN-09-007

Abstract:     
Since the Fall of 2008, out-of-the money puts on high interest rate currencies have become significantly more expensive than out-of-the-money calls, suggesting a large crash risk of those currencies. To evaluate crash risk precisely, we propose a parsimonious structural model that includes both Gaussian and disaster risks and can be estimated even in samples that do not contain disasters. Estimating the model for the 1996 to 2014 sample period using monthly exchange rate spot, forward, and option data, we obtain a real-time index of the compensation for global disaster risk exposure. We find that disaster risk accounts for more than a third of the carry trade risk premium in advanced countries over the period examined. The measure of disaster risk that we uncover in currencies proves to be an important factor in the cross-sectional and time-series variation of exchange rates, interest rates, and equity tail risk.

Number of Pages in PDF File: 68

Keywords: Exchange Rates, Disaster Risk, Currency Options

JEL Classification: E44, F31, G12


Open PDF in Browser Download This Paper

Date posted: May 7, 2009 ; Last revised: March 13, 2015

Suggested Citation

Farhi, Emmanuel and Fraiberger, Samuel P. and Gabaix, Xavier and Rancière, Romain G. and Verdelhan, Adrien, Crash Risk in Currency Markets (March 12, 2015). NYU Working Paper No. FIN-09-007 . Available at SSRN: http://ssrn.com/abstract=1397668 or http://dx.doi.org/10.2139/ssrn.1397668

Contact Information

Emmanuel Farhi
Harvard University - Department of Economics ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Samuel P. Fraiberger
Harvard University - Institute for Quantitative Social Sciences ( email )
1737 Cambridge St
Cambridge, MA 02115
United States
Northeastern University - Network Science Institute ( email )
177 Huntington Avenue
Boston, MA 02115
United States
NYU Stern School of Business - IOMS Department ( email )
New York, NY
United States
6179599809 (Phone)
6179599809 (Fax)
Xavier Gabaix
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Romain G. Rancière
Paris School of Economics (PSE) ( email )
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
Adrien Verdelhan (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 6,545
Downloads: 1,940
Download Rank: 4,983
References:  39
Citations:  36

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.312 seconds