This study empirically examines the effect of foreign exchange (FX) market liquidity risk and volatility on the excess … returns of currency carry trades. In contrast to the existent literature, we construct an alternative proxy of liquidity risk … evidence that uncovered interest parity (UIP) puzzle can be resolved after controlling for liquidity risk and market volatility …

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 …