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 - How much of carry trade excess returns can be explained by the presence of disaster risk? To answer this question, we propose a simple structural model that includes both Gaussian and disaster risk premia and can be estimated even in samples that do not contain disasters. The model points to a novel estimation procedure based on currency options with potentially different strikes. We implement this procedure on a large set of countries over the 1996--2008 period, forming portfolios of hedged and unhedged carry trade excess returns by sorting currencies based on their forward discounts. We find that disaster risk premia account for about 25% of expected carry trade excess returns in advanced countries. ER -