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http://ssrn.com/abstract=1415224
 
 

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Crash Risk in Currency Markets


Emmanuel Farhi


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

Samuel P. Fraiberger


New York University (NYU) - Department of Economics

Xavier Gabaix


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

Romain Ranciere


International Monetary Fund (IMF)

Adrien Verdelhan


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

June 2009

NBER Working Paper No. w15062

Abstract:     
Since the fall of 2008, option smiles have been clearly asymmetric: out-of-the-money currency options point to large expected exchange rate depreciations (appreciations) for high (low) interest rate currencies, suggesting that disaster risk is priced in currency markets. To study the price of disaster risk, we propose a simple structural model that includes both Gaussian and disaster risk and can be estimated even in samples that do not contain disasters. Estimating the model over the 1996 to 2011 period using exchange rate spot, forward, and option data, we obtain a real-time index of world disaster risk premia. We find that disaster risk accounts for more than a third of currency risk premia in advanced countries over the period.

Number of Pages in PDF File: 94

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Date posted: June 8, 2009  

Suggested Citation

Farhi, Emmanuel and Fraiberger, Samuel P. and Gabaix, Xavier and Ranciere, Romain and Verdelhan, Adrien, Crash Risk in Currency Markets (June 2009). NBER Working Paper No. w15062. Available at SSRN: http://ssrn.com/abstract=1415224

Contact Information

Emmanuel Farhi (Contact Author)
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
New York University (NYU) - Department of Economics ( email )
269 Mercer Street, 7th Floor
New York, NY 10011
United States
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/
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 Ranciere
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
Adrien Verdelhan
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
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