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Currency risk premiums redux?

Author

Listed:
  • Federico C. Nucera

    (Bank of Italy)

  • Lucio Sarno

    (University of Cambridge - Judge Business School)

  • Gabriele Zinna

    (Bank of Italy)

Abstract

We study a large currency cross section using asset pricing methods which account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors which resemble (but are not identical to) a strong U.S. "Dollar" factor, and two weak, high Sharpe ratio "Carry" and "Momentum" slope factors. Evidence for an additional "Value" factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium – mostly relating to volatility, uncertainty and liquidity conditions, rather than macro variables.

Suggested Citation

  • Federico C. Nucera & Lucio Sarno & Gabriele Zinna, 2023. "Currency risk premiums redux?," Temi di discussione (Economic working papers) 1415, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1415_23
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    References listed on IDEAS

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    7. Mads Markvart Kjær & Anders Merrild Posselt, 2025. "The U.S. Dollar and variance risk premia imbalances," The Financial Review, Eastern Finance Association, vol. 60(1), pages 173-200, February.
    8. Hsuan Fu & Shu-Fu Lee & Jui-Chung Yang, 2026. "Time-varying betas in foreign exchange returns: An IPCA approach," Review of Quantitative Finance and Accounting, Springer, vol. 66(3), pages 1253-1281, April.
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    10. Jia, Yuecheng & Simkins, Betty & Yan, Shu & Zhang, Hongyu & Zhao, Jiangyu, 2026. "Psychological anchoring effect and cross section of cryptocurrency returns," Journal of Banking & Finance, Elsevier, vol. 182(C).

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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