Do peso problems explain the returns to the carry trade?
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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. © 2010 The Author Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.
Published Version (Please cite this version)10.1093/rfs/hhq138
Publication InfoBurnside, C; Eichenbaum, M; Kleshchelski, I; & Rebelo, S (2011). Do peso problems explain the returns to the carry trade?. Review of Financial Studies, 24(3). pp. 853-891. 10.1093/rfs/hhq138. Retrieved from https://hdl.handle.net/10161/2017.
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Mary Grace Wilson Distinguished Professor
Burnside’s fields of specialization include macroeconomics and international finance. His recent research focuses on foreign exchange markets, empirical methods in finance, and the behavior of prices in housing markets. He has published articles in a number of academic journals, including the American Economic Review, the Journal of Political Economy, the Review of Economic Studies, and the Review of Financial Studies. He is a Research Associate of the National Bure