TY  - JOUR
AU  - Brunnermeier,Markus K.
AU  - Nagel,Stefan
AU  - Pedersen,Lasse H.
TI  - Carry Trades and Currency Crashes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14473
PY  - 2008
Y2  - November 2008
UR  - http://www.nber.org/papers/w14473
L1  - http://www.nber.org/papers/w14473.pdf
N1  - Author contact info:
Markus K. Brunnermeier
Princeton University
Department of Economics
Bendheim Center for Finance
Princeton, NJ 08540
Tel: 609/258-4050
Fax: 609/258-0771
E-Mail: markus@princeton.edu

Stefan Nagel
Stanford University
Graduate School of Business
655 Knight Way
Stanford, CA  94305
Tel: 650/724-9762
Fax: 650/725-7979
E-Mail: nagel_stefan@gsb.stanford.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu
M1  - published as Markus K. Brunnermeier, Stefan Nagel, Lasse H. Pedersen. "Carry Trades and Currency Crashes," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2008, Volume 23" University of Chicago Press (2009)

M3  - presented at "23rd  Annual Conference on Macroeconomics", April 4-5, 2008
AB  - 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.
ER  -