Do peso problems explain the returns to the carry trade?

Burnside, C. , Eichenbaum, M., Kleshchelski, I. and Rebelo, S. (2011) Do peso problems explain the returns to the carry trade? Review of Financial Studies, 24(3), pp. 853-891. (doi: 10.1093/rfs/hhq138)

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We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs that are on average large and uncorrelated with traditional risk factors. We argue that these payoffs reflect a peso problem. The underlying peso event features high values of the stochastic discount factor rather than very large negative payoffs.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Burnside, Professor Craig
Authors: Burnside, C., Eichenbaum, M., Kleshchelski, I., and Rebelo, S.
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Review of Financial Studies
ISSN (Online):1465-7368
Published Online:22 December 2010

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