Abstract
The Currency Carry Trade Anomaly
Highlights
The most likely explanation for the “excess” return was that it represented the reward for risk
Copeland and Lu [7] show that on closer inspection almost all the excess return to the carry trade is generated in months when the volatility is low, below its 25th quartile
Copeland and Lu [7] go on to show that the other factor is the real exchange rate
Summary
The most likely explanation for the “excess” return was that it represented the reward for risk. Brunnermeier et al [5] show that one of the risks which is priced relates to rare events, disasters or crashes in the sense of Barro [6] and the succeeding literature. Copeland and Lu [7] show that on closer inspection almost all the excess return to the carry trade is generated in months when the volatility is low, below its 25th quartile.
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