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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/28291
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| Title: | Crash Risk in Currency Markets |
| Authors: | Gabaix, Xavier
Farhi, Emmanuel
Fraiberger, Samuel
Ranciere, Romain
Verdelhan, Adrien |
| Issue Date: | 3-Sep-2009 |
| Series/Report no.: | FIN-09-007 |
| Abstract: | 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 which 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 on
their forward discounts. We find that disaster risk premia account for
about 25% of carry trade excess returns in advanced countries. |
| URI: | http://hdl.handle.net/2451/28291 |
| Appears in Collections: | Finance Working Papers
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