Do peso problems explain the returns to the carry trade?

Published

Journal Article

We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs that are on average large and uncorrelated with traditional risk factors. We argue that these payoffs reflect a peso problem. The underlying peso event features high values of the stochastic discount factor rather than very large negative payoffs. © 2010 The Author Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Burnside, C; Eichenbaum, M; Kleshchelski, I; Rebelo, S

Published Date

  • March 1, 2011

Published In

Volume / Issue

  • 24 / 3

Start / End Page

  • 853 - 891

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhq138

Citation Source

  • Scopus