Do peso problems explain the returns to the carry trade?

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Burnside, C
Eichenbaum, M
Kleshchelski, I
Rebelo, S

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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.






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Burnside, C, M Eichenbaum, I Kleshchelski and S Rebelo (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

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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 Bureau of Economic Research, and was previously a member of the Board of Editors of the American Economic Review (2001-06, 2011-20), Associate Editor for the Review of Economics and Statistics (2012-15), co-editor of the Canadian Journal of Economics (2007-10), and Associate Editor for the Journal of Money Credit and Banking (2003-11).

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