losses, which is consistent with the unwinding of the carry trade in times of high volatility. The decomposition of market … variance into average variance and average correlation shows that the predictive power of market variance is primarily due to … average variance since average correlation is not significantly related to carry trade returns. Finally, a new version of the …

-commodity price covariance, procyclical interest rates, negative price of exchange rate volatility, and countercyclical currency risk …

Many recent papers have investigated the role played by volatility in determining the cross-section of currency returns … returns from the currency carry trade. We show that the importance of volatility depends on whether the currency markets are … unexpectedly volatile. Volatility innovations during relatively tranquil periods are largely unrewarded in the market, whereas …