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Crash-neutral currency carry trades

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  • Jurek, Jakub W.

Abstract

Currency carry trades exploiting violations of uncovered interest rate parity in G10 currencies deliver significant excess returns with annualized Sharpe ratios 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.

Suggested Citation

  • Jurek, Jakub W., 2014. "Crash-neutral currency carry trades," Journal of Financial Economics, Elsevier, vol. 113(3), pages 325-347.
    • Handle: RePEc:eee:jfinec:v:113:y:2014:i:3:p:325-347
    DOI: 10.1016/j.jfineco.2014.05.004
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    More about this item

    Keywords

    Carry trade; Crash risk; Foreign exchange option; Forward premium anomaly; Uncovered interest rate parity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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