TY - JOUR AU - Farhi,Emmanuel AU - Fraiberger,Samuel Paul AU - Gabaix,Xavier AU - Ranciere,Romain AU - Verdelhan,Adrien TI - Crash Risk in Currency Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 15062 PY - 2009 Y2 - June 2009 UR - http://www.nber.org/papers/w15062 L1 - http://www.nber.org/papers/w15062.pdf N1 - Author contact info: Emmanuel Farhi Harvard University Department of Economics Littauer Center Cambridge, MA 02138 Tel: 617/496-1835 Fax: 617/495-8570 E-Mail: efarhi@harvard.edu Samuel Paul. Fraiberger New York University Economics Department New York University 19 W. 4th Street, 6FL New York, NY 10012 E-Mail: spf248@nyu.edu Xavier Gabaix New York University Finance Department Stern School of Business 44 West 4th Street, 9th floor New York, NY 10012 Tel: 212-998-0257 Fax: 212-995-4233 E-Mail: xgabaix@stern.nyu.edu Romain Ranciere International Monetary Fund Research Department, 9-612 700 19th Street NW Washington, DC 20431 Tel: 202 6238675 E-Mail: romainranciere@gmail.com Adrien Verdelhan MIT Sloan School of Management 100 Main Street, E62-621 Cambridge, MA 02142 Tel: 617/253-5123 E-Mail: adrienv@mit.edu AB - Since the fall of 2008, option smiles have been clearly asymmetric: out-of-the-money currency options point to large expected exchange rate depreciations (appreciations) for high (low) interest rate currencies, suggesting that disaster risk is priced in currency markets. To study the price of disaster risk, we propose a simple structural model that includes both Gaussian and disaster risk and can be estimated even in samples that do not contain disasters. Estimating the model over the 1996 to 2011 period using exchange rate spot, forward, and option data, we obtain a real-time index of world disaster risk premia. We find that disaster risk accounts for more than a third of currency risk premia in advanced countries over the period. ER -