Crash risk in currency markets / Emmanuel Farhi, Samuel Paul Fraiberger, Xavier Gabaix, Romain Ranciere, Adrien Verdelhan Farhi, Emmanuel

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Creator
Farhi, Emmanuel
Subjects
Currency crises.; Carry trades (Foreign exchange); Foreign exchange market.
Summary
"How much of carry trade excess returns can be explained by the presence of disaster risk? To answer this question, we propose a simple structural model that includes both Gaussian and disaster risk premia and can be estimated even in samples that do not contain disasters. The model points to a novel estimation procedure based on currency options with potentially different strikes. We implement this procedure on a large set of countries over the 1996--2008 period, forming portfolios of hedged and unhedged carry trade excess returns by sorting currencies based on their forward discounts. We find that disaster risk premia account for about 25% of expected carry trade excess returns in advanced countries"--National Bureau of Economic Research web site.
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http://trove.nla.gov.au/work/113212
Work ID
113212

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