Common Risk Factors in Currency Markets

dc.contributor.authorLustig, Hanno
dc.contributor.authorRoussanov, Nikolai
dc.contributor.authorVerdelhan, Adrien
dc.date2023-05-17T14:31:51.000
dc.date.accessioned2023-05-22T19:16:27Z
dc.date.available2023-05-22T19:16:27Z
dc.date.issued2011-01-01
dc.date.submitted2016-06-08T11:09:32-07:00
dc.description.abstractWe identify a “slope” factor in exchange rates. High interest rate currencies load more on this slope factor than low interest rate currencies. This factor accounts for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. A standard, no-arbitrage model of interest rates with two factors—a country-specific factor and a global factor—can replicate these findings, provided there is sufficient heterogeneity in exposure to global or common innovations. We show that our slope factor identifies these common shocks, and we provide empirical evidence that it is related to changes in global equity market volatility. By investing in high interest rate currencies and borrowing in low interest rate currencies, U.S. investors load up on global risk.
dc.identifier.urihttps://repository.upenn.edu/handle/20.500.14332/34438
dc.legacy.articleid1084
dc.legacy.fields10.1093/rfs/hhr068
dc.legacy.fulltexturlhttps://repository.upenn.edu/cgi/viewcontent.cgi?article=1084&context=fnce_papers&unstamped=1
dc.rightsThis is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rfs/hhr068.
dc.source.beginpage3731
dc.source.endpage3777
dc.source.issue335
dc.source.issue11
dc.source.journalFinance Papers
dc.source.journaltitleReview of Financial Studies
dc.source.peerreviewedtrue
dc.source.statuspublished
dc.source.volume24
dc.subject.otherFinance
dc.subject.otherFinance and Financial Management
dc.titleCommon Risk Factors in Currency Markets
dc.typeArticle
digcom.contributor.authorLustig, Hanno
digcom.contributor.authorRoussanov, Nikolai
digcom.contributor.authorVerdelhan, Adrien
digcom.identifierfnce_papers/335
digcom.identifier.contextkey8706758
digcom.identifier.submissionpathfnce_papers/335
digcom.typearticle
dspace.entity.typePublication
upenn.schoolDepartmentCenterFinance Papers
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