Currency regimes, volatility risks, and carry trades: The option value of government currency intervention in emerging markets

This study investigates the relationship between cross-sectional carry trade returns and global foreign exchange volatility risk. During periods of high volatility innovations, the average carry trade returns on emerging markets are higher than that of all countries or developed economies. Furthermore, the average returns on managed-float and fixed-rate carry trades are significantly higher than that of freefloat carry trade. Government currency intervention in emerging markets can explain these differences.