Crash risk in currency markets
By: Emmanuel Farhi, Samuel Paul Fraiberger, Xavier Gabaix, Romain Ranciere, Adrien Verdelhan.
Contributors: Farhi, Emmanuel.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15062; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15062.
Publisher: National Bureau of Economic Research
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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.
Notes: Title from PDF file as viewed on 6/9/2009.

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