Do peso problems explain the returns to the carry trade?

Craig Burnside, Martin Eichenbaum, Isaac Kleshchelski, Sergio Rebelo*

*Corresponding author for this work

Research output: Contribution to journalArticle

171 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)853-891
Number of pages39
JournalReview of Financial Studies
Volume24
Issue number3
DOIs
StatePublished - Mar 1 2011

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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