Crash-neutral currency carry trades

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Crash-neutral currency carry trades

Jurek, Jakub W.

Journal of financial economics, 09/2014, Volume: 113, Issue: 3

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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.

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Jurek, Jakub W.

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