We investigate the relation between global foreign exchange (FX) volatility risk and the cross section of excess returns arising from popular strategies that borrow in low interest rate currencies and invest in high interest rate currencies, so‐called “carry trades.” We find that high interest rate currencies are negatively related to innovations in global FX volatility, and thus deliver low returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding positive returns. Furthermore, we show that volatility risk dominates liquidity risk and our volatility risk proxy also performs well for pricing returns of other portfolios.

While financial inclusion is typically addressed by improving the financial infrastructure we show that financial literacy, representing the demand-side of financial markets, also has a beneficial effect. We study this effect at the crosscountry level, which allows to consider institutional variation. Regarding "access to finance", financial infrastructure and financial literacy are mainly substitutes. However, regarding the "use of financial services", the effect of higher financial literacy strengthens the effect of more financial depth. The causal interpretation of these results is supported by IV-regressions. Moreover, the positive impact of financial literacy holds across income levels and several subgroups within countries.

Technical analysis involves the prediction of asset price movements from inductive analysis of past movements. We establish a number of stylized facts, including that technical analysis is widespread in the foreign exchange market and that it may be profitable. We then analyze four arguments that have been put forward to explain this: that the market may not be fully rational; that technical analysis may exploit the influence of official interventions; that it may be an efficient form of information processing; and that it may inform on nonfundamental influences. While each may have some validity, the latter is the most plausible.