Currency carry trades–buying high-deposit-rate currencies and selling low-deposit-rate currencies–earn positive excess returns over time. The literature has heretofore explained this phenomenon based on currency differences. We examine the possibility that the bank default risk of...

When a developed-market investor buys emerging-market stocks, this investor may be justified not to hedge currency risk. Our analysis indicates that completely unhedged portfolios often perform better than fully hedged portfolios and are not significantly inferior to optimally hedged portfolios....