Do peso problems explain the returns to the carry trade?
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. © 2010 The Author Published by Oxford University Press on behalf
of The Society for Financial Studies. All rights reserved.
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https://hdl.handle.net/10161/2017Published Version (Please cite this version)
10.1093/rfs/hhq138Publication Info
(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.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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Show full item recordScholars@Duke
A. Craig Burnside
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
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