NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Carry Trades and Currency Crashes

Markus K. Brunnermeier, Stefan Nagel, Lasse H. Pedersen

NBER Working Paper No. 14473
Issued in November 2008
NBER Program(s):   AP   EFG   IFM   ME

This paper documents that carry traders are subject to crash risk: i.e. exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints.

download in pdf format
   (255 K)

email paper

This paper is available as PDF (255 K) or via email.

This paper was revised on December 16, 2013

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14473

Published: Carry Trades and Currency Crashes, Markus K. Brunnermeier, Stefan Nagel, Lasse H. Pedersen. in NBER Macroeconomics Annual 2008, Volume 23, Acemoglu, Rogoff, and Woodford. 2009

Users who downloaded this paper also downloaded these:
Burnside w17278 Carry Trades and Risk
Burnside, Eichenbaum, and Rebelo w16942 Carry Trade and Momentum in Currency Markets
Burnside Comment on "Carry Trades and Currency Crashes"
Burnside, Eichenbaum, and Rebelo w12916 The Returns to Currency Speculation in Emerging Markets
Lustig, Roussanov, and Verdelhan w14082 Common Risk Factors in Currency Markets
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us