a time-varying risk premium consistent with that bias. Using ten years of data on FX order flow we find that more than … find that carry trading increases currency-crash risk in that order flow generates negative skewness in FX returns. …

-specific risk factors and use the joint conditional distribution of these components to obtain forecasts of future carry trade … competing models. We show that the forecasting gains translate into economically and statistically significant (risk …

of peso problems (systematically irrational expectations in the market) and time-varying risk premiums in explaining the …

should not. A risk premia story might justify the high returns to the carry trades. In this paper we study the relationship … risk factors. Asset pricing theory applies to the currency market: those currencies that have larger loading on risk …, especially crash risk, offer a larger mean return in compensation. Especially, we show that crash risk as measured by quantile …