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Currency Risk Premia Redux

Author

Listed:
  • Sarno, Lucio
  • Nucera, Federico
  • Zinna, Gabriele

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

  • Sarno, Lucio & Nucera, Federico & Zinna, Gabriele, 2023. "Currency Risk Premia Redux," CEPR Discussion Papers 18012, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18012
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    More about this item

    Keywords

    Currency risk premia;

    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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