Do Peso Problems Explain the Returns to the Carry Trade?
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- 22 December 2010
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 24 (3), 853-891
- https://doi.org/10.1093/rfs/hhq138
Abstract
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.This publication has 27 references indexed in Scilit:
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