NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Peso Problems Explain the Returns to the Carry Trade?

A. Craig Burnside, Martin S. Eichenbaum, Isaac Kleshchelski, Sergio Rebelo

NBER Working Paper No. 14054
Issued in June 2008
NBER Program(s):   AP   EFG   IFM   ME

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 which 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.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w14054

Published: Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2011. "Do Peso Problems Explain the Returns to the Carry Trade?," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 853-891.

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