understanding of currency carry trade returns, and invalidates, for example, explanations invoking return skewness and crash risk …

global macroeconomic fundamental risk. The risk factor is the cross-country high-minus-low conditional skewness of the …

been profitable historically. The risk exposure of carry traders might explain their high returns, but conventional models … of risk do not work because traditional risk factors, used to price the stock market, do not price currency returns. Less … to the stock market. More exotic models of "crisis risk" are another possibility, but I show that any time-variation in …

-year horizon. The estimated model implies that the variation in the exposure of U.S. investors to world-wide risk is the key driver … excess returns compensate U.S. investors for taking on aggregate risk by shorting the dollar in bad times, when the U ….S. price of risk is high. The counter-cyclical variation in risk premia leads to strong return predictability: the average …

1996 to 2011 period using exchange rate spot, forward, and option data, we obtain a real-time index of world disaster risk … expected exchange rate depreciations (appreciations) for high (low) interest rate currencies, suggesting that disaster risk is … priced in currency markets. To study the price of disaster risk, we propose a simple structural model that includes both …

increases, because the local currency term premia offset the currency risk premia. The time series predictability of foreign … international finance cannot match the downward term structure of currency carry trade risk premia. While currency risk premia on … short-term bonds reflect differences in transitory and permanent risk, we show that the premia on long-term bonds only …

speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso …

. Dynamically spread-weighting and risk-rebalancing positions improves performance. Equity, bond, FX, volatility, and downside …

between our returns and a conventional set of so-called risk factors …