The financial crisis of 2007-2008 had major implications for the foreign exchange market. We review events and implications for exchange rates, volatility, returns to currency investing, and transaction costs. This “blow-by-blow” narrative is intended to be a resource for researchers seeking a comprehensive review of the “what, why and when” of the financial crisis in terms of foreign exchange market dynamics. An implementable financial stress index (FSI) is created and then used to illustrate the dramatic nature of the current crisis compared to earlier crises. We also examine how the global FSI might have been used to condition the exposure to the carry trade (long high interest rate currencies, short low interest rate currencies) and we show that such an index has potential value in protecting a portfolio against loss during periods of stress, although this result is subject to the important caveats of controlling for transaction costs and timely recognition of the change in regime.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2707.
Find related papers by JEL classification: F30 - International Economics - - International Finance - - - General F31 - International Economics - - International Finance - - - Foreign Exchange
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008.
"Carry Trades and Currency Crashes,"
NBER Working Papers
14473, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008.
"Carry Trades and Currency Crashes,"
NBER Chapters,
in: NBER Macroeconomics Annual 2008
National Bureau of Economic Research, Inc.
[Downloadable!]
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