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Crash-Neutral Currency Carry Trades

51 Pages Posted: 14 Sep 2008 Last revised: 7 Oct 2013

Jakub W. Jurek

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: August 31, 2013

Abstract

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.

Keywords: currency carry trade, crash risk, foreign exchange option, forward premium anomaly, uncovered interest parity (UIP)

JEL Classification: F31, G12

Suggested Citation

Jurek, Jakub W., Crash-Neutral Currency Carry Trades (August 31, 2013). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1262934 or http://dx.doi.org/10.2139/ssrn.1262934

Jakub W. Jurek (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1588 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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