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
DO  - 10.3386/w14473
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 08544
Tel: 609/258-4050
Fax: 609/258-0771
E-Mail: markus@princeton.edu

Stefan Nagel
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL 60637
E-Mail: stefan.nagel@chicagobooth.edu

Lasse H. Pedersen
Copenhagen Business School
Solbjerg Plads 3, A5
DK-2000 Frederiksberg
DENMARK
E-Mail: Lhp001@gmail.com
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  -